The S&P looks calm while the stocks inside it get destroyed.

Names in the AI complex have been 40% off their highs while the index barely moved…

People are calling that a distortion and asking whether index options are broken…

They’re not. 

What’s happening is telling you where the money is.

That’s just sector rotation.

A sector gets hot, it runs, and there’s a run for calls. The other sectors aren’t doing that, they’re not displaying the volatility that one is, and for the S&P it kind of dampens the whole thing.

When money is staying in the market, you get that flatter S&P. When money is getting out of the market, they sell everything.

What the desks that trade this are seeing

I’m not a dispersion trader and I’m not the best person to ask about it, but the firms that do trade it have been watching this all year.

Average single stock volatility hit a one-year high around 45% this spring while the VIX touched 15.6. Implied correlation, which is the market’s estimate of how much stocks move together, fell to historic lows near 10.5.

Cboe’s own derivatives people called it extreme dispersion, with traders switching from macro risk to stock-specific catalysts.

Money is picking winners and losers inside the market instead of leaving it.

And it’s a reason a lot of firms buy individual equity vol and sell index volatility. There’s definitely opportunity in that direction. It just goes away when sectors cool.

What it looked like when the Mag Seven got shelled

That move took the S&P down to 7300 recently.

Two, three, four percent. It wasn’t a ton, but it moves fast.

Meanwhile you had all these smaller and mid cap stocks that were up two, three, four, five hundred percent on the year, and they barely register in the S&P at all. They got shellacked.

So when you’re looking at an index that dropped three percent, you’ve got to ask which stocks in it are getting clobbered, because the answer is usually not the ones making the headlines.

The thing that can turn it into an index problem

Sometimes there’s runaway volatility in equities, and liquidity providers sell so many calls in individual names that they need to buy calls somewhere, anywhere, somewhere.

When I was a market maker it was exactly that feeling. I need to buy some calls. I can’t be short a thousand calls right now.

You can be short a thousand calls and have no delta. It’s not a problem now, but it could become a bad problem later.

So okay, I’m going to go buy a hundred freaking SPX calls, because it beats the alternative.

That’s how vol goes up, and when the factor thing moves too far one way it shows up in the index.

How high can a stock go?

People ask whether a beaten up sector is going to bounce, and what they’re asking is whether the market is going to bounce.

A lot of the time a sector sells off because it’s overbought.

How high can a stock go? Theoretically it’s infinite discounted returns, but in practice the market bids it up to a certain point and that’s it.

If I knew exactly what that number was, this would be a lot easier.

Markets have seasons, or there’s fashion in it. What do they like, what do they not like.

The thing I’m most excited about

The thing I’m most excited about is a group of stocks nobody would call exciting.

There are value companies out there that win from AI because they use it and become more productive. It’s bottom line oriented, and it shows up in earnings instead of in a story.

A lot of companies look sleepy and stodgy right now. Some of them start implementing this technology and their prospective valuation changes.

We haven’t even started AI with robots yet.

Are all those chips going to be on a robot? Are they going to be connected? I don’t know, but the future on that score is interesting.

So it’s easy to be bullish on stocks here, especially the ones trying to incorporate it.

I’m closet bullish on SpaceX too. I’d like to get it at a little better price.

That’s what the Sybil program is built to find, and it’s the thing I’m most excited about heading into the second half of the year.

Learn more about the Sybil Trade Finder here

Andrew Giovinazzi