The US stock market had been stuck in a strange state of high volatility paired with a low VIX for an extended period, but a broad sell-off last Friday changed the game, sending the VIX index soaring. Has the bull market taken a turn?
Recent US market action has been turbulent, ranking among the most volatile periods in history, yet the CBOE Volatility Index (VIX), known as the "fear gauge," had remained eerily calm. Last Friday's widespread sell-off completely upended this peculiar situation.
Over the past two months, the semiconductor sector surged relentlessly, gaining a cumulative 80% and adding roughly $500 billion in market value to the Nasdaq 100 Index (NDX). This rally not only spawned the hottest ETF launch in history but also sent dozens of individual stocks on steep upward trajectories. However, the ascent came to an abrupt halt last Friday, with the VanEck Semiconductor ETF (SMH) falling nearly 10% at its intraday low.
The VIX index had just hit its lowest level since January on Thursday, only to post its largest single-day gain since March on Friday. On the same day, trading volume for CBOE S&P 500 Index (SPX) options hit a new record of 7.8 million contracts, 16% higher than the previous record set in April.
To many market observers, this decline serves as a warning signal: speculative sentiment had become overheated in the face of a flood of impending IPOs and potential interest rate pressures. For options traders closely tracking the wild swings in individual stocks, the broader market's pullback appears more like a delayed correction catching up to the extreme moves seen in single names.
Earlier last week, several key volatility metrics had reached extreme levels. CBOE data showed the spread between single-stock volatility and index volatility hit a record high, while the one-month implied correlation between the top 50 stocks by market cap and the broader market fell to a one-year low. Within this context, the VIX's prolonged period below its historical average seemed particularly anomalous.
Volatility Returns to Normal as Individual Stock Speculative Premiums Converge Lower
Brent Kochuba, founder of the options analytics platform Spot Gamma, stated on a conference call: "Various market indicators are realigning. The inflated premiums on call options for stocks like Micron Technology Inc (NASDAQ: MU), where the notional value of options even exceeded the combined value of options on the SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ), were unsustainable and had to come down. While the VIX has moved higher, it has not entered extreme fear territory."
The bond market also failed to provide stability for equities. Spurred by strong non-farm payroll data on Friday, the 10-year US Treasury yield jumped 40 basis points. Traders piled into bearish bets on bonds, with heavy flows into put options on the iShares 20+ Year Treasury Bond ETF (TLT). In the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), put open interest reached more than eight times that of calls.
Amid this confluence of negative factors, the Nasdaq Composite Index (IXIC) recorded its worst single-day performance since April 2025.
Danny Kirsch, Head of Options at Piper Sandler, analyzed: "The market was a powder keg ready to blow. Heavy positioning in leveraged ETFs focused on semiconductors, combined with large tech and cloud companies like Meta Platforms Inc (NASDAQ: META) and Alphabet Inc (NASDAQ: GOOGL) issuing new shares ahead of massive IPOs, amplified the risks further."
Wharton Professor: Sharp Drop is a Normal Correction, Not the Start of a Prolonged Decline
Jeremy Siegel, Emeritus Professor of Finance at the Wharton School of the University of Pennsylvania and Chief Economist at WisdomTree, commented on Bloomberg's "The Close" that last Friday's tech sell-off is a typical pullback following a steep price advance and such retreats usually do not mark the beginning of a deep bear market.
He cited a classic Wall Street adage to describe the action: "The stock market takes the stairs up and the elevator down. The semiconductor and memory chip sectors had seen a parabolic rise, attracting trend followers and momentum capital. Once the trend breaks, that capital exits en masse, which is a core reason for the sharp decline."
Siegel believes such sharp rallies and corrections are common within strong uptrends: "This is almost never *the* ultimate top; it's more likely a short-term peak. Prices often fall back and then try to test the highs again; a failure on that retest is what could potentially lead to a deeper correction. For a rally this steep, a short-term pullback is normal."
In Siegel's view, the current AI-driven market advance is fundamentally different from past asset bubbles. AI technology holds the potential to broadly enhance societal productivity, with long-term value comparable to the changes brought by the Industrial Revolution.
He stated: "The market needs to understand that this AI revolution and the rally led by the 'Magnificent Seven' tech giants represent a completely new paradigm."
Siegel also cautioned investors that the foundation for sustained, explosive stock price gains is the ability of corporate earnings to remain permanently elevated. "For stock prices to double, earnings need to double permanently to support it. If chip industry earnings only maintain high growth for three or four years before normalizing, then current stock prices are severely overvalued. Investors must be wary of the illusion of short-term earnings spikes, as the semiconductor industry is inherently cyclical."
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