ROI-Wild stock moves beneath an eerily calm surface: Mike Dolan

Not a ‌bit of it. The benchmark Cboe Volatility Index, long known as the "fear gauge" on Wall Street, is snoozing well below historic averages and near its lowest level of the year.

Wild daily swings in individual stocks might suggest a frothy ​market in the final throes of a speculative frenzy. But Wall Street's "fear gauge" is snoozing. And it may take ​good news to wake it up. It's hard not to get dizzy watching ‌the ​huge individual daily price gains in large-cap stocks lately, as the AI boom appears to heat up, accelerate and draw in more chip and tech equipment names far and wide.

In just the past few trading sessions, 20% to 30% one-day surges have become routine, even for companies with market caps of $200 billion or more. Dell soared 32% on Friday after its ‌blowout results. Hewlett Packard Enterprise leapt 28% on Tuesday on its own earnings update. Marvell Technology gained 25% on just one favorable nod from Nvidia boss Jensen Huang. These are the latest in a long list of wild moves, driven mostly by the AI capital expenditure explosion, but playing out bang in the middle of a geopolitical oil shockand a year of existential angst for some sectors.Software stocks suffered withering selloffsbefore staging equally eye-popping rallies over the past month.

So the overall volatility gauges must be flashing red, right? Not a ‌bit of it.

The benchmark Cboe Volatility Index, long known as the "fear gauge" on Wall Street, is snoozing well below historic averages and near its lowest level of the year. But that calm is deceptive.

LPL Financial strategist Adam Turnquist ‌contrasts the sleepy VIX with the Cboe's VIXEQ, which measures implied volatility across individual S&P 500 constituent stocks. The VIXEQ is back near its highest level since the tariff-related storm of April last year. Indeed, the gap between the two indexes is almost three times the average of the past decade.

"The divergence has been driven largely by historically low correlations among S&P 500 stocks," Turnquist said. "Significant earnings-related reactions both up and down, widening performance gaps between AI beneficiaries and laggards and other more idiosyncratic catalysts have contributed to elevated dispersion across the index." What's more, speculative buying of call options in individual technology stocks, rather than ⁠the index itself, ​is stoking individual stock volatility too.

"However, the current backdrop could become ⁠vulnerable if correlations begin to rise," Turnquist warned. That could pressure "dispersion trades" that profit from selling index volatility and buying single-stock equivalents. RE-CORRELATE

Paradoxically, that re-correlation could be triggered not by a new shock but by a confluence of good news, including positive economic and political developments. On one level, the dispersion makes sense ⁠given the concentration of the AI theme in a narrow cluster of red-hot stocks, with clear winners and losers, just as the Iran war jolts sectors exposed to energy prices and interest rates.

But what if the war ends, oil prices ebb and the AI boom fans ​out more broadly across the economy, even to the labor market, despite all the angst about robot displacement? Already, the dramatic recovery of software stocks suggests fears about AI losers may have been overblown. The jobs market still ⁠shows few signs of major disruption.

But could a wave of relatively positive economic news mechanically reduce that dispersion, nudging the VIX higher in the process? That is not the usual script: calmer geopolitics, lower oil prices or broader AI gains could also suppress both dispersion and index volatility. Interest-rate markets would also have ⁠a ​say, particularly if the net effect stoked more inflation.

But a rising VIX could act as a brake of sorts on the overall equity rally. That matters because its current serenity underpins a benign backdrop for three giant IPOs planned this summer: SpaceX, Anthropic and, likely, OpenAI. There's already trepidation about the market impact of public listings that could raise up to $200 billion in new shares from three companies targeting a combined valuation of around $3.75 trillion.

Many of the deep dives into how the ⁠market will absorb this new equity splurge, including Alphabet's $80 billion in equity financing announced this week, are relatively sanguine. They focus on index inclusions, demand from passive funds and some rejig of weightings as lock-up periods eventually expire. But successful debuts and ⁠target valuations set the tone. They also rely partly on a ⁠low-volatility environment that reduces the risk of damaging pricing missteps.

If the herd suddenly charges in one direction, a re-awakening of the fear gauge could make for a very bumpy summer. (The opinions expressed here are those of Mike Dolan, a columnist for Reuters.) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn, and ‌X. And listen to the Morning Bid daily ‌podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and finance ​seven days a week.

(by Mike Dolan; Editing by Marguerita Choy)