Volatility Dispersion Appears Near Peak as Mega-Cap Earnings Approach
MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN AAPL, MSFT, GOOGL, AND AMZN LONG-TERM
Market Narrative
With implied correlations sitting at unusually low levels, the widening spread between VIXEQ—measuring constituent-level volatility—and the VIX suggests dispersion remains elevated, a condition that has historically coincided with periods where markets become more vulnerable to pullbacks.
This pattern has been visible around prior earnings seasons, particularly once large-cap and mega-cap companies finish reporting, and single-stock implied volatility begins to decline.
Recent strength in stocks such as Meta, Tesla, Microsoft, and Apple appears consistent with this backdrop, as volatility typically rises into earnings and compresses afterward, rather than reflecting a sudden shift in fundamentals.
The S&P 500 continues to trade near resistance around 6,930 after filling much of the gap created on January 22, while volatility dispersion appears to be near a cyclical peak as earnings season progresses. If dispersion unwinds as earnings season progresses, correlations would likely rise, increasing the probability of a broader equity retracement, particularly if the S&P 500 moves back below 6,900 or fails to clear resistance near 6,975.
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Fully Edited Transcript by ChatGPT
This is one of the more active periods of the year, as earnings season overlaps with volatility dispersion season. We are currently in the middle of that dispersion trade, which would likely begin to unwind as we move through the middle of this week and get past the bulk of the large and mega-cap earnings reports. This week includes reports from Microsoft, Apple, Tesla, and Meta Platforms, followed next week by Amazon and Alphabet. Once these reports are out of the way, volatility dispersion typically starts to unwind, something we have discussed many times before.
With implied correlations currently at extremely low levels, the market appears to be in a position where downside risk could begin to increase. We saw similar conditions in October, and one of the more effective ways to track this dynamic is through the VIX EQ, which measures constituent-level volatility within the S&P 500, compared with the VIX, which measures index-level volatility. A widening spread between VIX EQ and the VIX signals falling implied correlations and rising dispersion.
Recently, that spread has widened again, similar to what we have seen in prior periods that were followed by market drawdowns. These included July 2023, July 2024, January 2025 during the tariff-related volatility, and October 2025. While not every drawdown was large, the pattern has been fairly consistent over time.
This dynamic is also evident when looking at individual stocks. For example, the volatility index on Amazon tends to rise into earnings and decline sharply afterward. The same behavior was visible recently in Goldman Sachs following its earnings report, and a similar pattern is developing in IBM ahead of its results. This reflects the dispersion between individual stock volatility and index volatility.
The trade itself typically involves funds selling index volatility while buying single-stock volatility, which benefits from earnings-related uncertainty. Once earnings season passes, the trade unwinds, correlations rise, and dispersion declines. That process often coincides with broader market weakness.
Recent strength in Meta and Tesla also fits this pattern. Meta and Tesla both rallied sharply in recent sessions, despite limited fundamental news, which is consistent with volatility dispersion dynamics ahead of earnings. Microsoft and Apple have also seen strength, likely reflecting similar positioning rather than a fundamental shift.
From a technical standpoint, the S&P 500 does not appear particularly strong. A major trendline has been broken, and on the hourly chart the index stalled near 6,930 after nearly filling the gap from January 22. For the rally to continue, the index would need to quickly move above 6,930, fully fill the gap, and push toward 6,975. A move below 6,900 early next week would likely increase the probability of a retracement toward the 6,800 area.
The Nasdaq has already filled its gap from January 22 and has broken its uptrend. It continues to struggle near the 25,800 level, an area that has capped rallies since early November. If dispersion begins to unwind over the coming week or into early February, the equity market could weaken further, potentially leading the Nasdaq to undercut its prior low near 23,900.
Overall, volatility dispersion appears to be at or near a peak, and history suggests that once the major earnings reports are complete, the unwind of this trade could coincide with increased market volatility and downside pressure.
Defined Terms and Jargon by ChatGPT
Volatility Dispersion: A market condition where individual stock volatility is significantly higher than overall index volatility, often occurring during earnings season.
Implied Correlation: A measure of how closely stocks are expected to move together based on options pricing. Low implied correlation suggests stocks are moving more independently.
VIX: An index that measures expected volatility of the S&P 500 based on options prices.
VIX EQ: A measure of average implied volatility across individual S&P 500 constituents, rather than the index as a whole.
Gap Fill: A technical concept referring to prices returning to a previously untraded range created by a sharp market move.
Trendline Break: A technical signal indicating that an established price trend may no longer be intact.
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