① While news of near-daily trading halts in South Korean stocks dominates global financial headlines, the S&P 500 has actually been doing "push-ups" at elevated levels—stagnating for over a month; ② However, some industry insiders are noticing that beneath this seemingly calm surface, the underlying structure of the U.S. stock market may be undergoing a dramatic qualitative change.
Cailian Press, July 17 (Edited by Xiaoxiang) While news of near-daily trading halts in South Korean stocks dominates global financial headlines, the S&P 500 has actually been doing "push-ups" at elevated levels—stagnating for over a month. However, some industry insiders are noticing that beneath this seemingly calm surface, the underlying structure of the U.S. stock market may be undergoing a dramatic qualitative change.
A severe unwinding of momentum trades, the market's hottest play, has indeed hit investors hard, particularly those inclined to use leveraged ETFs and options to amplify bets on strong-performing semiconductor stocks like Micron Technology and funds like the Roundhill Memory ETF (DRAM). Both in the U.S. and South Korea, the semiconductor sector has recently suffered widespread outflows.
But an interesting phenomenon is that major indices, including the S&P 500, appear calm—as of Thursday, the index traded just one percentage point away from its all-time high set on June 2. Yet the swings of many individual components within the index have been far more dramatic.
Over the past month or so, the daily action in U.S. stocks has evolved into an extreme "seesaw" game:
It's either a frenzied solo dance by AI infrastructure concept stocks like semiconductors, or a rise in heavyweight stocks led by the "Magnificent Seven" alongside other traditional sectors—one or the other, but not both.
On Thursday, the S&P 500 closed down 0.5%, but it remains slightly up for July so far. In contrast, some gauges tracking momentum stocks have performed much worse. Industry data shows the Goldman Sachs High Beta Momentum Index fell 24% in the first half of July, one of its worst performances on record.
As the recent sharp swings in individual stocks far outpace the overall volatility of the S&P 500, the spread between two key implied volatility measures has widened to its highest level ever:
Dow Jones Market Data shows that on July 9, the spread between the Cboe S&P 500 Constituent Volatility Index (VIXEQ) and the Cboe Volatility Index (VIX) widened to over 34 points, the largest gap on record. Since then, the spread has remained near that level.
Farzin Azarm, Managing Director of Equity Trading at Mizuho Securities, said the recent selling wave in South Korean stocks has begun to unsettle him. FactSet data shows that although the Korea Composite Stock Price Index (KOSPI) is still up over 60% year-to-date, it has fallen 20% so far in July. The index's gains this year have largely been driven by just two stocks—Samsung and SK Hynix.
Reminiscent of That Summer Two Years Ago?
Some, including Michael Kramer, founder of Mott Capital Management, note that the huge disparity between individual stock volatility and index-level volatility is reminiscent of conditions preceding past market turmoil—such as during the unwinding of the yen carry trade in August 2024.
"AI-related stocks have been propping up the major indices, creating a false impression of market calm. But beneath the surface, market conditions have actually been much more volatile," Kramer said.
Kramer pointed out that the Cboe S&P 500 Dispersion Index recently hit its highest level since March 2020, further evidence of underlying tension beneath the index's surface. This index rises when investor expectations for the movement of certain individual stocks begin to diverge from those for the S&P 500 index.
Kramer noted that a similar pattern emerged in the summer of 2024—when the unwinding of the yen carry trade led to selling pressure first hitting the tech stocks with the heaviest leveraged buying. The vast majority of other stocks in the market were less impacted.
Azarm worries that if semiconductor stocks remain under pressure this time, highly leveraged investors might be forced to sell off a broader portfolio of stocks.
"People might need to sell stocks to cope with these memory stock moves," Azarm said. "That's the concern."
Notably, while U.S. stocks closed lower overall on Thursday, investors seemed to witness a new form of sector rotation. This time, chip stocks and the "Magnificent Seven" fell in tandem, bucking the recent trend of these two groups moving in opposite directions during daily trading. Market data shows that despite the S&P 500's overall decline for the day, most of its components still closed higher—eight of the index's 11 sectors ended in positive territory.
This divergence was even more pronounced in the performance gap between the Nasdaq and the Dow. FactSet data shows the tech-heavy Nasdaq Composite Index fell sharply by 1.5% on Thursday, closing at 25,881.95. In contrast, the Dow Jones Industrial Average fell just 105.67 points, or 0.2%, to close at 52,552.97.
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