BlockBeats report, July 16: Bank of America stated that the current U.S. stock market is showing another signal reminiscent of the dot-com bubble era. On Tuesday, the bank noted that the market is facing a new "shock risk" due to a concerning divergence: individual stock volatility continues to rise, while overall market index volatility remains relatively stable, despite ongoing capital rotation within the technology sector.
A report released by the Chicago Board Options Exchange (CBOE) in June showed that the gap between the S&P 500 Equal Weight Volatility Index (VIXEQ) and the VIX volatility index has widened to a historic high. VIXEQ measures the volatility of individual stocks in the S&P 500, while the VIX is regarded as the market’s “fear gauge.” As of Tuesday, VIXEQ stood at approximately 50 points, rising about 46% year-to-date; in comparison, the VIX was around 16 points, up only about 13% this year.
The global equity derivatives research team at Bank of America stated that a similar divergence occurred just before the dot-com bubble burst. Currently, the actual volatility indicators for individual stocks tracked by the team have rebounded to levels seen prior to the bubble’s collapse. The analysts wrote: “The gap between individual stock and index volatility has approached the extreme levels observed during the dot-com bubble. Market shock risk is real.”
They noted that index volatility remains low, causing this historical divergence to widen further. If, in the future, stock prices not only continue to rise but valuations also enter bubble territory, this divergence could even surpass the extreme levels seen during the dot-com bubble. Additionally, Bank of America warned that U.S. equities are entering a seasonally weaker period; historical data shows that May through October are typically the six weakest months of the year for U.S. stocks.