Extreme volatility divergence exposes ‘fragile footing’ for S&P

Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeInvestorExtreme volatility divergence exposes ‘fragile footing’ for S&PThe gap between index-wide calm and single-stock chaos is nothing new for traders, but lately it has grown extremeAuthor of the article:Last updated 10 minutes ago Besides the upcoming reporting season, traders are bracing for a number of potentially market-moving events in the U.S. Photo by Michael M. Santiago/Getty ImagesStock-market risks are everywhere. But you would be hard pressed to tell anything was wrong by looking at the surface of major U.S. equity gauges.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountThe S&P 500 index is about to end the third quarter exactly where it began. The Nasdaq 100 index, after briefly plunging into a correction, has since shrugged off rising bond yields and risks to the artificial intelligence trade. The CBOE Volatility index, or VIX, is well below the 20 level that often signals market stress.This advertisement has not loaded yet, but your article continues below.Chalk it up to a violent rotation in which rising and falling stocks and sectors are largely balancing each other out, keeping the broader market steady. This gap between index-wide calm and single-stock chaos is nothing new for traders, but lately it has grown extreme, reaching the widest level since the height of the dot-com crash in 2000, according to data compiled by Macro Risk Advisors.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try againTo Dean Curnutt, chief executive of the company, the possibility of the broader market falling victim to a big macro shock is a risk hiding in plain sight — and one that Wall Street traders aren’t positioning for. A potential selloff in AI hyperscalers and chipmakers could fuel a rout, forcing the whole market to move together as one.“If a few hyperscalers pull back on AI spending tied to data-centre debt concerns as yields rise, that would be awful for the stock market already on fragile footing,” said Curnutt, who is urging clients to use of VIX calls and call spreads for protection against any drawdowns. “You don’t buy flood insurance rooting for your home to flood. You gotta play defence here.”This advertisement has not loaded yet, but your article continues below.As the calendar flips to October — historically the most volatile month for U.S. stocks — Wall Street is grappling with a series of risks, from the durability of the artificial-intelligence trade to the threat of higher interest rates amid sticky inflation.Optimism that the United States and Iran are getting close to ending the war, coupled with strong economic data in the U.S., have pushed traders to offload their hedges and load up on upside calls. A one-month, 25-delta put-to-call skew on the S&P 500 is sitting in the bottom-fifth percentile of observations, according to Mandy Xu, head of derivatives market intelligence at CBOE Global Markets Inc. The 500-member gauge opened 0.3 per cent higher on Wednesday, while the Nasdaq 100 traded up 0.5 per cent.The appetite for risk is equally pronounced on a single-stock level. Roughly 40 per cent of the top 100 stocks in the S&P 500 are trading with an inverted call skew — a sign of extreme bullishness, Xu said. With JPMorgan Chase & Co. kicking off earnings season Oct. 13, Xu sees the scope for single stock volatility to rise even more relative to index volatility, particularly against a backdrop of higher rates, which have historically been a catalyst for more stock dispersion, she said.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.“Given how depressed index volatility is with the lack of hedging activity, it suggests a potential for a sharper pullback in the broader stock market in the coming weeks and months on any negative, unexpected headline or catalyst,” Xu said by phone.Bulls, for their part, are taking solace in the data showing economic growth remains resilient to geopolitical jitters, elevated bond yields and persistent inflationary pressures. When earnings season kicks off in about two weeks, S&P 500 companies will likely show a third consecutive quarter of profit expansion above 20 per cent. That would be the first such instance since 2018, excluding the COVID-19 fuelled rebound, according to Bloomberg Intelligence data.Besides the upcoming reporting season, traders are bracing for a number of potentially market-moving events in the U.S., from the jobs print on Friday, to the consumer price index report on Oct. 14 and an interest-rate decision on Oct. 28.That leaves stocks in a vulnerable position to any surprises, given that investors are betting on few fireworks in the next couple of days. Should that calculation misfire, the return of volatility may interrupt the stock market’s streak of calm.This advertisement has not loaded yet, but your article continues below.The S&P 500 is projected to swing just 0.7 per cent in either direction when the latest jobs report gets released on Friday, in line with the average realized move on labour-report days in the past 12 months, according to options-market data compiled by Citigroup Inc.There is also a growing divergence in volatility in the stock and bond markets. The VIX, which measures expected price swings in the S&P 500, is sitting around 16. Meanwhile, the ICE BofA MOVE index, the bond market’s version of the VIX, spiked to as high as 104.58 last week, the highest level since the Middle East turmoil in late March. That is signalling the bond market is bracing for volatility to stay elevated.As a result, the ratio between the two is hovering near the lowest level since late 2024. All of which means traders are staring anxiously at fixed-income markets for an early read on when volatility in the S&P 500 could resurface again.“Rates and stock valuations are appropriate for the level of growth in the economy,” said Scott Ladner, chief investment officer at Horizon Investments, whose firm is snapping up companies tied to AI infrastructure while dumping rate sensitive small-capitalization companies. “But all of this hinges on earnings growth continuing to deliver.”We apologize, but this video has failed to load.This advertisement has not loaded yet.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.