Markets are again reaching overheated levels, as measured by implied volatility, correlations, and the dispersion index. Generally, the measures show that implied volatility on the S&P 500 Index (SP500) appears to be low relative to single-stock implied volatility.
In past examples, when the spread between index and single-stock volatility has widened too much, it has led to rising market volatility and sharp pullbacks. We just saw a minor example of this around the beginning of June, following the May job report.
One reason may be that we are seeing very high levels of implied volatility in semiconductor stocks relative to the rest of the market and their historical norms. As semiconductor stocks like Micron and Broadcom become more prominent in the index.
Overall, it would appear that the market is misaligned and that there is a growing risk that the unwind of this imbalance may be near, with either single-stock volatility set to fall or index volatility set to rise.
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