The S&P 500 has been treading water for more than a month now, but beneath the surface volatility has been bubbling up
The spread between two important gauges of implied volatility has expanded to its widest level on record. Is something about to snap?
The S&P 500 has been treading water for more than a month now, but beneath the surface of the U.S. equity market, big changes are taking shape.
A vicious unwind of the market's hottest momentum trades has hammered investors, particularly those who favored using leveraged ETFs and options to amp up their bets on highflying semiconductor names like Micron Technology $(MU)$, and ETFs like the Roundhill Memory ETF DRAM. In the U.S. and South Korea, semiconductor stocks have slumped.
And yet, major indexes like the S&P 500 SPX have appeared calm. As of Thursday, the index was trading within a percentage point of its June 2 record high. But moves in many of the index's constituents have been much bigger.
Over the past month or so, daily action, particularly in the U.S., has started to resemble a seesaw. Either shares of semiconductors and other AI infrastructure plays would be up, or else it would be the "Magnificent Seven" and everything else.
On Thursday, the S&P 500 finished 0.5% lower, and the index was still modestly in the green for the month of July. But some gauges of momentum-stock performance were doing much worse. The Goldman Sachs High-Beta Momentum Index fell 24% during the first half of July, one of the worst showings on record, according to Bloomberg data shared with MarketWatch.
As large swings in individual stocks have recently dwarfed moves for the S&P 500 as a whole, the spread between two important gauges of implied volatility has expanded to its widest level on record. On July 9, the spread between Cboe S&P 500 Constituent Volatility Index and the Cboe Volatility index VIX widened to more than 34 points, the biggest gap on record, Dow Jones Market Data showed. It has remained very close to that level ever since.
Farzin Azarm, managing director of equities trading at Mizuho Securities, said the recent selloff in South Korean stocks has started to make him nervous. Korea's Kospi Composite index KR:180721 is down 20% so far in July, although it remains up more than 60% so far in 2026, FactSet data showed. Much of the index's gains this year have been driven by shares of just two stocks, Samsung (KR:005930) and SK Hynix (KR:000660).
Some, including Michael Kramer, founder of Mott Capital Management, said the wide divergence between single-stock volatility and index-level volatility was reminiscent of the run-up to previous market shocks, like the unwind of the yen carry trade in August 2024.
"AI-related stocks have been carrying the major indexes, creating the illusion of a calm market. But beneath the surface, conditions have been far more volatile," Kramer said.
Kramer pointed to the Cboe S&P 500 Dispersion Index, which recently touched its highest level since March 2020, as more evidence of the tension present beneath the surface of the index. The dispersion index rises when investors' expectations for how certain individual stocks will move begins to diverge with the S&P 500.
A similar pattern emerged during the summer of 2024, Kramer said.
Azarm is worried that if the semiconductor names remain under pressure, heavily leveraged investors might be forced to sell a broader basket of names.
"People may need to sell to satisfy what is happening with these memory names," Azarm told MarketWatch. "That is the fear."
U.S. stocks finished lower on Thursday, but investors were treated to another round of rotation action. This time, semiconductor names and members of the "Magnificent Seven" - an elite group of megacap stocks - sank in tandem, bucking a recent trend that has seen the two groups move in opposite directions on a day-to-day basis. Meanwhile, most other S&P 500 closed higher despite the index's drop in price. Eight of the index's 11 sectors finished in the green.
The tech-heavy Nasdaq Composite COMP fell 1.5% to finish at 25,881.95. The Dow Jones Industrial Average DJIA fell 105.67 points, or 0.2%, to 52,552.97, FactSet data showed.
-Joseph Adinolfi
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 16, 2026 16:42 ET (20:42 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
