Ignore the VIX, which is stuck around 18. The US stock market is experiencing volatility well beyond the normal range of a bull market. According to reports from Zhitong Finance, the broader S&P 500 index has appeared calm in recent weeks, as individual stock movements—no matter how significant—have largely cancelled each other out. However, the situation is starkly different at the sector level, with capital rotating from one industry to the next at lightning speed.
Based on data compiled by Sevens Report, in 2026 so far, the weekly performance gap between the best and worst-performing sectors of the S&P 500 has reached double-digit percentages eight times. In this century, the only years with a similar number of such occurrences within the same timeframe were 2000, 2001, and 2009—all periods of significant infamy in US stock market history. Sevens Report technical analyst Tyler Richey stated, "Such a massive divergence in weekly sector performance should be viewed as a quantifiable market warning signal." Historical periods with similar characteristics "have invariably been accompanied by increased volatility in the broader market and the formation of signs of a sustained market top."
Worsening Sector Divergence
The intense turbulence beneath the S&P 500's placid surface has triggered alarms at BTIG LLC and Sevens Report. They believe the current trend is less a healthy rotation and more a signal of an impending market correction. BTIG LLC Chief Market Technical Analyst Jonathan Krinsky stated, "I would define sector rotation as fundamentally driven—meaning people have fundamental reasons to sell one class of stocks and buy another—which is completely different from liquidating positions." The market's recent erratic swings "look more like a liquidation event than a rotation."
Krinsky wrote in a report last week that US stocks are heading toward a record number of days this year where the S&P 500 moves in one direction, but a measure of market breadth (more stocks advancing than declining) moves in the opposite direction. Since the end of May, four of the eight instances where the double-digit weekly gap between the S&P 500's best and worst performers occurred have taken place. Over this period, the broader market has remained relatively calm as investors weigh conflicting news regarding the Iran war, the outlook for AI trades, and the latest quarterly earnings reports.
The coming days may bring another wave of intense inter-sector volatility, as traders prepare for the second interest rate decision from Federal Reserve Chairman Jerome Powell on Wednesday and the busiest week of the second-quarter earnings season. Mega-cap tech stocks, including Microsoft, Meta, and Apple, are all scheduled to report earnings between Wednesday and Thursday. In fact, a metric tracked by Cboe Global Markets, measuring dispersion in US stocks over the next 30 days, hit an all-time high earlier in July, surpassing the record set in April 2025 during the market turmoil triggered by President Trump's comprehensive global tariffs. For Richey, this turbulence is a symptom of the market "beginning to question the core narrative that has driven the US stock rally for the past three and a half years."
Divergence Continues to Widen
Admittedly, others on Wall Street still view the current market landscape as a rotation. The trading desk at JPMorgan encouraged traders to go long momentum factors in a "more accommodative macro environment," adding that the recent sell-off appears more like a "rotation than a de-risking event." However, in Krinsky's view, the pattern becomes concerning when stock correlations are near historic lows while the broader market is at near-record highs. Earlier this month, a measure of expected three-month correlation between stocks was at 0.08, a record low. "When correlations get this low, they only have one direction to move," he said. In this scenario, he worries that correlations could rise due to a broad-based decline in stocks.
Comments