Nvidia’s stock selloff has focused attention on the prospects for U.S. stocks in the second half of this year. This also sheds lithe on volatility indicators, which have remained at a reduced level for several months. The Vix index, which measures volatility in the S&P 500, has risen in recent sessions. It currently stands at 13.4, still below the past 12-month average of 14.5. So this sell-off isn’t particularly volatile so far, which explains why the sell-off in Nvidia and Super Micro Computer hasn’t led to a broader sell-off in other asset classes or other regions.
US large-cap stocks facilitate stabilize the index
Some may wonder why the piercing 11% drop in Nvidia’s share price over the last 5 days hasn’t resulted in a deeper selloff, since it is one of the most influential stocks on the US blue-chip stock market. This is because the correlation between the 50 highest-valued companies on the S&P 500 is low.
The chart below shows the 3-month CBOE Implied Correlation Index for the 50 largest companies in the S&P 500 Index. It shows how correlated the 50 largest companies in the S&P 500 Index are to each other. While this is not a measure of volatility, it shows how the largest U.S. stocks are moving index. Last week, the implied correlation dropped to an 18-year low. This suggests that large-cap stocks in the S&P 500 do not move in sync with each other, and when one stock falls, another rises, keeping the index balanced and volatility low.
Since then, the 3-month correlation has increased to 11, but remains well below the annual average of 19.
Three-month implied CBOE correlation of the 50 largest stocks in the S&P 500 index
Source: XTB and Bloomberg
This suggests two things:
1, The correlation between the 50 largest companies in the S&P 500 index is increasing, but is not at an elevated level.
2, This means that the Nvidia sell-off cannot drag the rest of the S&P 500 down. If the rest of the index’s massive stocks continue to fluctuate regardless of Nvidia, the AI stock selloff may not have a major impact on the S&P 500.
We will continue to monitor this correlation indicator as it is a good measure of risk attitude. If it starts to grow, it may be a signal that a broader decline in the stock market is expected.