Quant Strategy Goes Haywire as Panic Buying Overruns Stocks

"When you see very strong momentum combined with a sharp rise in trading volume, that can serve as a signal of overheating and speculative behavior," Kalesnik said by phone. "The issue with speculator money is they can come in and drive prices up and once they see signs of something happening, they quickly leave and drag prices down."

Nvidia Corp., VMware Inc. and Micron Technology Inc. hold the biggest positions in the Bloomberg trade activity portfolio, and have gained as much as 22 percent in January alone. But the potential for sharp reversals was put on display Wednesday, when semiconductor stocks in the S&P 500 tumbled 2.4 percent, the most in seven weeks, on the heels of a disappointing earnings report from Texas Instruments Inc.

The only other instances of liquid share outperformance occurred when equities began to recover from the bear market lows in 2002 and 2009. But the difference is that in those periods this was a healthy sign because the most beaten up shares had been oversold during the downturn, enabling them to outperform off those lows when the market rebounded, according to Joseph Mezrich, head of U.S. quantitative analysis at Nomura Instinet LLC.

This time, gains in the most liquid shares are pointing to pure panic, he said.

"What you're observing is a panicked market," Mezrich said. "You have people panicking to get into these stocks because of a fear of missing out. It's a lack of rationality."

— Check out Gary Shilling, Famed Bubble Detector, Urges Caution on Stocks on ThinkAdvisor.