A key measure of tech stock volatility that options traders have been watching all year has reversed, sending a sign to investors that the U.S. bond market may be usurping AI optimism as the main driver of the stock market.
The volatility spread between big tech stocks and the rest of the stock market, most often measured by the difference between the CBOE’s VIXEQ index and the VIX index, ballooned to record highs this summer as the tech giants behind the AI boom regularly swing market capitalizations by hundreds of billions of dollars a day while the rest of the market stagnates. Now, the trend has reversed, with traders selling off their equity exposure across the index in large quantities as VIX surged to its highest since April compared to VIXEQ.
Combined with the accelerating sell-off in U.S. Treasuries and the 10-year Treasury yield nearing a three-year high of 5%, this suggests that investors are likely shifting their focus to macroeconomics and policy as the main catalysts for market direction.
US 10-year Treasury, year-to-date
“Single-stock implied volatility exceeded S&P 500 implied volatility throughout the summer as traders downplayed macro issues and focused on stock-specific stories, particularly in the AI space,” Scott Nations, president of Nations Index, said in an email. “This trend is reversing with a resurgence in inflation driven by soaring oil prices. Responses to the Fed’s Sept. 16 meeting and other political and geopolitical concerns are dominating thinking.”
Oil futures rose above $100 for the first time since May, and energy stocks in the S&P 500 index hit new highs on Thursday. State Street Energy Select Sector SPDR ETF (XLE) has widened its lead over technology stocks as the best-performing sector this year, now up 43%.
According to Nations, the volatility of 18 of the 19 stocks tracked by Nations Index’s VolDex index, a volatility measure that uses at-the-money option prices, collapsed on Thursday. ExxonMobil was an exception.
Another important factor that sucks volatility out of AI trading has nothing to do with bonds, oil, or the Federal Reserve. It’s the end of earnings season, a natural catalyst for increased volatility around big binary events. There is also a kind of feedback loop between stock prices and option demand among retail traders. micron and sandisk When the rally stops, the flow of bullish options slows.
Micron’s implied volatility has fallen from a pre-earnings high of 112 in late June to a low of 58 last week, despite the stock’s decline. Similarly, space xvolatility fell from a high of 122 to 56, despite rising 30% since the August report.
“The relationship between cross-market/individual stock and index volatility has normalized,” said Kevin Davitt, head of index options content at Nasdaq. “The epicenter of the divergence earlier this summer was the cicada, and we saw the cicada rally spill over into index options, particularly NDX.”
