When Korean stock meltdowns become a common occurrence: US stocks fall into a strange "false calm"?
While news about the Korean stock market melting down almost every day grabs the headlines of global financial media, the S&P 500 Index has actually been "doing push-ups" at a high level - it has been standing still for more than a month. However, some people in the industry are noticing that beneath this seemingly calm surface, the underlying structure of the U.S. stock market may be undergoing drastic qualitative changes.
While news about the Korean stock market melting down almost every day grabs the headlines of global financial media, the S&P 500 Index has actually been "doing push-ups" at a high level - it has been standing still for more than a month. However, some people in the industry are noticing that beneath this seemingly calm surface, the underlying structure of the U.S. stock market may be undergoing drastic qualitative changes. The violent unwinding of the market's hottest momentum trades has really hit investors, especially those who tend to use leveraged ETFs and options to increase bets on strong semiconductor stocks like Micron Technology and funds like the Roundhill Memory ETF (DRAM). In the United States and South Korea, the semiconductor sector has suffered extensive blood loss recently. But an interesting phenomenon is that major stock indexes, including the S&P 500, appear calm. As of Thursday, the index was trading only one percentage point away from the all-time high set on June 2. But many of the index's constituents have moved much more widely. Over the past month or so, the daily trend of U.S. stocks has evolved into an extreme seesaw game: Either AI infrastructure concept stocks such as semiconductors are dancing wildly alone, or heavyweight stocks led by the Big Seven and other traditional sectors are rising. It is either one or the other. On Thursday, the S&P 500 closed down 0.5%, but the index is still up slightly so far in July. By contrast, some measures of momentum stock performance have fared much worse. The Goldman Sachs High Beta Momentum Index fell 24% in the first half of July, one of its worst performances on record, according to industry data. With recent large moves in individual stocks far exceeding those in the S&P 500 as a whole, the spread between two important measures of implied volatility has widened to its highest level ever: Dow Jones market data shows that on July 9, the spread between the Cboe S&P 500 Volatility Index (VIXEQ) and the Cboe Volatility Index (VIX) widened to more than 34 points, the largest gap ever. The gap has remained around that level since then. Farzin Azarm, managing director of equity trading at Mizuho Securities, said the recent sell-off in South Korean stocks has begun to make him feel uneasy. FactSet data shows that although the Korean Composite Index has risen by more than 60% this year, it has fallen by 20% so far in July. The index's gains this year have been largely driven by just two stocks - Samsung and SK Hynix. Just like that summer two years ago? Some, including Mott Capital Management founder Michael Kramer, said the large difference between individual stock volatility and index-level volatility is reminiscent of conditions before previous market turmoil - such as the unwinding of yen carry trades in August 2024. "Artificial intelligence-related stocks have been supporting the major stock indexes, creating the illusion of calm in the market. But under the surface, market conditions are actually much more volatile," Kramer said. Kramer noted that the Cboe S&P 500 Dispersion Index recently hit its highest level since March 2020, which is further evidence of the tension beneath the index's surface. The S&P 500 rises when investors' expectations for the direction of certain individual stocks begin to diverge from those of the S&P 500. Kramer said that a similar trend occurred in the summer of 2024 - when the yen carry trade was unwound, technology stocks with the most leveraged buying bore the brunt of the sell-off. Most other stocks in the market were less affected. Azarm worries that if the pressure on semiconductor stocks continues this time, highly leveraged investors may be forced to sell their broader stock portfolios. "People may need to sell stocks to counter the movement in these storage stocks," Azarm said. "That's what people are worried about."
It is worth noting that while the overall U.S. stock market closed lower on Thursday, investors seemed to have witnessed a new round of rotation. This time, chip stocks and the Big Seven fell in tandem, bucking the recent trend of the two groups moving in opposite directions in daily trading. Market data showed that although the S&P 500 index fell overall on the day, most of its constituent stocks still ended higher - 8 of the 11 sectors in the index ended in the green. This divergence is even more pronounced in the performance differences between the Nasdaq and the Dow. FactSet data shows that the Nasdaq Composite Index, which has a relatively high proportion of technology stocks, fell sharply by 1.5% on Thursday to close at 25,881.95 points. The Dow Jones Industrial Average fell only 105.67 points, or 0.2%, to close at 52552.97 points. (
It is worth noting that while the overall U.S. stock market closed lower on Thursday, investors seemed to have witnessed a new round of rotation. This time, chip stocks and the Big Seven fell in tandem, bucking the recent trend of the two groups moving in opposite directions in daily trading. Market data showed that although the S&P 500 index fell overall on the day, most of its constituent stocks still ended higher - 8 of the 11 sectors in the index ended in the green. This divergence is even more pronounced in the performance differences between the Nasdaq and the Dow. FactSet data shows that the Nasdaq Composite Index, which has a relatively high proportion of technology stocks, fell sharply by 1.5% on Thursday to close at 25,881.95 points. The Dow Jones Industrial Average fell only 105.67 points, or 0.2%, to close at 52552.97 points. (