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A key tech-stock volatility metric options traders have been watching all year is reversing, sending a sign to investors that the U.S. bond market may now be usurping AI optimism as the primary driver of the stock market.<\/p>\n
The spread between the volatility of big tech names and the rest of the stock market \u2013 measured most frequently by the difference between the Cboe’s VIXEQ and VIX indexes \u2013 blew out to record highs this summer as tech giants behind the AI boom regularly moved hundreds of billions of dollars of market cap per day while the rest of the market stayed stagnant. Now the trend is reversing, with traders selling broad chunks of index-wide equity exposure as VIX jumps to the highest since April relative to VIXEQ.<\/p>\n
Paired with an accelerating sell-off in U.S. Treasury bonds and the 10-year yield approaching a three-year high of 5 percent, it’s a sign that investors are likely shifting their focus to macroeconomics and policy as the primary catalysts for the market’s direction.<\/p>\n
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U.S. 10-year Treasury, YTD<\/p>\n
“Throughout the summer single-name implied volatility raced ahead of S&P 500 implied volatility as traders discounted macro issues and focused on name-specific stories, particularly in the AI space,” Scott Nations, president at Nations Indexes, said in an email. “That trend is reversing as resurgent inflation\u2014fueled by higher oil prices \u2014 the Fed’s response at its September 16th meeting, and other political and geopolitical concerns dominate thinking.”<\/p>\n
Crude oil futures are back above $100 for the first time since May and energy stocks in the S&P 500 Index made fresh highs Thursday as the State Street Energy Select Sector SPDR ETF (XLE)<\/a> extended its lead over technology stocks as the best-performing sector of the year, now up 43 percent.<\/p>\n Volatility in 18 of 19 stocks tracked by Nations Indexes’ VolDex metric \u2013 a volatility gauge that uses at-the-money options prices \u2013 collapsed on Thursday, according to Nations. Exxon Mobil was the exception.<\/p>\n There’s one other key factor sucking volatility out of the AI trade that’s unrelated to bonds, oil and the Federal Reserve \u2013 the end of earnings season, a natural catalyst for elevated volatility around big binary events. There’s also a feedback loop of sorts between stock prices and demand for options among retail traders: when popular stocks like Micron<\/a> and SanDisk<\/a> stop going up, the options flows that lean bullish slow down.<\/p>\n