Bank of America: Warning signs similar to those seen during the dot-com bubble era have appeared in the U.S. stock market, with “shock risk” accumulating

BlockBeats message: On July 16, Bank of America said that the current US stock market is showing another signal similar to the dot-com bubble era. The bank pointed out on Tuesday that the market is facing a new “shock risk,” driven by a concerning divergence: individual stock volatility has been steadily rising, while overall market index volatility remains relatively stable, even as capital rotation continues within tech stocks.

A report released in June by the Chicago Board Options Exchange (CBOE) showed that the gap between the S&P 500 component stock volatility index (VIXEQ) and the VIX volatility index has widened to the highest level in history. VIXEQ is used to measure the volatility of individual component stocks in the S&P 500, while VIX is seen as the “panic index” measuring overall market volatility. As of Tuesday, VIXEQ was about 50 points, up about 46% year-to-date; by contrast, VIX was about 16 points, up only about 13% this year.

Bank of America’s Global Equity Derivatives Research team said that a similar divergence occurred in the period just before the dot-com bubble burst. At present, the real-world volatility metrics for the individual stocks they track have returned to the levels seen before the bubble burst. The analysts wrote: “The gap between individual stock and index volatility has approached the extreme levels of the dot-com bubble period. The shock risk to the market is real.”

They noted that index volatility remains at low levels, causing this historic divergence to keep widening. If, in the future, not only stock prices rise but valuations also move further into a bubble-like range, this divergence could even exceed the extreme levels seen in the dot-com bubble period. In addition, Bank of America also warned that the US stock market is entering a period of seasonally weaker performance. Historical data shows that from May to October each year are typically the six weakest months of the year for US stocks.