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3 Key Takeaways
Elevated dispersion and low correlations across S&P 500 components signal that volatility is likely to rise in the near term.
Realized volatility remains near historic lows, a condition that has often preceded sharp market pullbacks in the past.
Monitoring proxies like Wingstop and private equity leaders such as Blackstone and Apollo can offer early clues to weakening market structure and liquidity stress.
Fully Edited Transcript by ChatGPT
This week, I wanted to take a closer look at what’s happening in the market from the standpoint of volatility, dispersion, and correlation. It’s easy to focus on the S&P 500 and assume the uptrend will continue indefinitely, but that’s not how I approach market analysis. I prefer a more detailed examination of the underlying mechanics—an approach that sets this analysis apart and aligns with the discussions we have in the membership area.
The first thing that stands out is the VIX Index, which appears to be changing direction and potentially shifting into a new uptrend. The VIX has begun to gradually round higher, and the RSI (Relative Strength Index) confirms a subtle trend change. While technical analysis on the VIX is challenging since it’s an oscillator rather than a price series, the signals suggest a meaningful turn higher in volatility.
Next, the VIXEQ—the Constituent Volatility Index, which tracks volatility across the individual stocks of the S&P 500—has been trending steadily upward. When compared to the VIX, this reveals a growing divergence: index-level volatility has risen modestly, while constituent-level volatility has increased more sharply. Although data on the VIXEQ is limited due to its relatively recent introduction, current readings are near the upper end of its historical range, similar to volatility conditions earlier in the year when the market experienced choppiness and drawdowns.
This divergence between the VIX and VIXEQ indicates growing dispersion across the S&P 500. The Dispersion Index (DSPX), which dates back to 2015, shows a clear trend higher since 2020. The shift likely reflects structural market changes, such as the introduction of zero days-to-expiration (0DTE) options in 2022. What once counted as elevated dispersion levels now appear more normalized due to this new trading dynamic.
Currently, dispersion sits around 34.3, its highest since early 2024 during the “tariff tantrum” and before the Yen (Yamagunen) episode that triggered a sharp sell-off in global equities. Similar dispersion spikes occurred in July 2023, September 2020, and during the COVID crash—all periods associated with heightened market volatility or corrections.
High dispersion confirms that correlations between individual stocks and the broader index are very low. In other words, the S&P 500’s components are moving more independently from one another. Historically, such low correlation levels have preceded spikes in market-wide volatility. Indeed, implied correlations are now at some of the lowest points since late 2024 and early 2025, echoing setups seen before previous volatility surges, such as in 2018 and during the “Volmageddon” event.
While implied volatility looks poised to rise, realized volatility—especially the three-month measure—remains exceptionally low. Historically, realized volatility this suppressed has preceded sharp reversals, including those before COVID (early 2020), the 2018 Christmas Eve sell-off, and the early-2018 volatility shock. These setups often coincide with short-term “melt-up” rallies before corrections unfold, similar to what we’re seeing now.
Another dimension worth watching is liquidity-sensitive stocks, which often serve as early indicators of market stress. For instance, Wingstop (WING) has historically tracked future moves in equities fairly well. Meanwhile, Blackstone (BX)—a major private equity name—has been weakening after peaking in late 2024 and early 2025, following a pattern seen before prior market volatility phases in 2018 and 2021. The same can be said for Apollo Global (APO) and Ares (ARES), both showing signs of deterioration after lower highs and recent breakdowns.
Even within the Mega Cap (MAG7) group, leadership looks fractured. Meta (META), for example, has rolled over since peaking in late summer 2025, erasing post-earnings gains. This mirrors historical topping behavior seen in 2018, 2020, and 2021. The rotation between sectors—where leadership flips daily between the top seven tech stocks and the rest of the S&P 500 (as measured by RSP, the equal-weighted index)—further reflects the rising dispersion environment.
Lastly, consider semiconductors (SMH), which have surged to overbought conditions, with RSI readings near 80 and prices pressing against upper Bollinger Bands. Similar setups in mid-2024 led to near-term corrections.
Altogether, the combination of high dispersion, low correlation, and low realized volatility strongly suggests a coming regime shift toward greater market volatility. Historically, these factors have preceded major pullbacks or volatility spikes. While timing is uncertain, the probability of a volatility expansion appears high based on these structural metrics.
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Defined Terms and Jargon by ChatGPT
VIX (Volatility Index): A measure of the market’s expectation for near-term volatility, derived from S&P 500 options prices.
RSI (Relative Strength Index): A momentum indicator used in technical analysis to identify overbought or oversold conditions.
Oscillator: A technical analysis tool that fluctuates within a bounded range to indicate momentum shifts.
VIXEQ (Constituent Volatility Index): An index measuring the average implied volatility of the individual stocks in the S&P 500, as opposed to the index as a whole.
Dispersion (DSPX): A measure of how differently individual stock prices move relative to each other within an index.
0DTE Options (Zero Days to Expiration): Options contracts that expire the same day they are traded, often used for short-term speculation or hedging.
Implied Correlation: The degree to which individual stocks’ implied volatilities move together with the index’s implied volatility.
Realized Volatility: The actual, historical volatility of an asset, calculated from past price movements.
Liquidity Gauge: A stock or indicator used as a proxy for market liquidity or investor risk appetite.
RSP (S&P 500 Equal-Weighted Index): A version of the S&P 500 in which each stock has equal weight, reflecting the performance of the “other 493” versus the large-cap leaders.
RSI 80: A technical level indicating extremely overbought market conditions.
Bollinger Bands: A volatility-based indicator that plots standard deviation bands around a moving average to signal overbought or oversold conditions.
Volmageddon: The February 2018 volatility event when inverse volatility products collapsed, triggering market turmoil.
Disclaimer
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