US stocks rebounded strongly from the sharp deleveraging in July, prompting investors to chase gains, while volatility indicators rapidly dropped to nearly calm levels. However, Wall Street traders and strategists are warning: beneath the surface calm, market structures have become fragile, and any external catalyst could trigger rapid, self-reinforcing directional shocks.
The VIX index has plummeted from around 21 points in July to near 15 points—a level historically associated with absolute market calm. Meanwhile, Goldman Sachs's internal panic gauge has fallen from 7.9 at the end of July to below 1, hitting its lowest point since June 2024. Bloomberg market strategist Jan-Patrick Barnert noted that the position structure left over from last month's massive deleveraging makes the market highly vulnerable to directional shifts driven by mechanical fund flows, ahead of key risk events like upcoming inflation data, Nvidia's earnings report, and the Jackson Hole central bank symposium.
Three Wall Street trading desks have offered nearly identical descriptions of current August activity: investors are selectively chasing gains, but not with full conviction. Fundamental factors may support current index levels, but market sentiment is far from broadly optimistic. The evidence of this chasing is not reflected in price action but is clearly imprinted in the options market.
Options Market Shows 'Biblical' Distortion
After the brutal deleveraging in July, buying institutions were generally underweight, just as they encountered one of the strongest earnings seasons in recent years. Concurrently, a market rotation began, with stocks outside the AI sector and high-quality AI names both becoming core risk-taking targets. Charlie McElligott, cross-asset strategist at Nomura, said clients were "caught off guard" and immediately started chasing. Evidence of this chasing is not in price action but is clearly etched in the options market: call options are being snapped up, while put options are rapidly losing value as indices surge away from everyone's hedging strike prices. McElligott described the resulting skew distortion as "biblical." The 25-delta call skew for the S&P 500 and Nasdaq 100 has both reached the flattest levels on record, while call option volume on the S&P 500 has hit record highs. Over the past week, realized volatility has been significantly higher on up days than down days, suggesting the market's primary fear is missing out on further gains.
Single-Stock Volatility Wiped Out, Risks Persist Beneath Calm
Volatility at the individual stock level has been largely smoothed out. Lee Coppersmith, an expert in derivatives and fund flows at Goldman Sachs, noted that the average one-month implied volatility for Nasdaq 100 stocks fell by 9.1 percentage points over three trading days, with a 6-percentage-point decline for S&P 500 stocks. Coppersmith said, "In the AI era, we've only seen larger volatility during the August 2024 volatility shock and the April 2025 tariff event," when the VIX briefly exceeded 60 points. Over the past month, the VIX's peak has only reached about 21 points before quickly retreating. However, this may be where the problem lies. Although Goldman Sachs's internal panic gauge has fallen to a trough, a nonfarm payroll report showing a loss of 23,000 jobs, Treasury yields hovering around 4.7%, the latest episode of yen intervention, and the unresolved Iran conflict together paint a picture of macro risks that cannot be ignored. Earnings data looks strong, but the macroeconomic backdrop is far from confirming everything is positive.
AI is No Longer a Macro Position, But a Stock-Picking List
At the index level, overall exposure appears fully risk-on. But beneath the surface, skepticism remains. AI trading is still the market's core, but thematic leadership baskets are diverging. Not all stocks hit hard in July have seen a strong rebound—memory chip stocks are a typical example. Nick Savone, Global Head of Institutional Equity Consulting and Client at Morgan Stanley, wrote, "This may be a broader insight that familiar trades are reviving without simply returning to the old script. Dispersion remains extremely high. After the July deleveraging, investors are putting money back to work—but with more discernment." Morgan Stanley data shows that dispersion among S&P 500 stocks is at the 92nd percentile of the past five years, while the ratio of cross-sector to intra-sector dispersion is only at the 35th percentile. This means stock-picking ability is overtaking thematic allocation as the market's dominant logic. AI is no longer a trade to hold as a whole, but a list of stocks to select from carefully.
Position Structure is a Double-Edged Sword; Next Catalyst Could Trigger Chain Reaction
The current chase has turned position structure into a double-edged sword. Aggregate dealer gamma is slightly negative, and above the 7900-point strike price, there are significant dealer short call option positions. If the market rises further, this could accelerate a "melt-up" rally. The problem lies on the other side. Previously "burned" put options are now well below the spot price, while the signal-reversal point for trend-following strategies corresponds to a roughly 4% decline—a zone that heavily overlaps with the area where dealer short put options are concentrated. On the macro narrative, today's inflation data is not seen as a core risk for August, with market attention more focused on the end-of-month Nvidia earnings report and the Jackson Hole symposium. These two events align closely with the historical pattern of increased volatility in autumn. Bloomberg strategist Barnert concluded that the gradual rebuilding of positions after the aggressive de-risking in July, combined with continued demand for downside hedging, has created conditions for a rapid and violent market move when the next catalyst appears. Given that investors likely hold neither enough downside protection nor sufficient upside exposure, the probability of the market remaining highly dynamic is quite high.
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