VXN-VIX spread surges to 2-year high as tech volatility diverges from S&P 500

A growing divergence between the VIX and the Nasdaq-100 volatility index has volatility traders bracing for a potential sharp selloff in equities.

The VIX drifted below 16 on Thursday even as the Nasdaq-100 volatility index, or VXN, surged, pushing the spread between the two to levels not seen in years.

"The benign way for convergence would be for Nasdaq-100 stocks to calm down, allowing VXN to slide back toward VIX," said Lawrence G. McMillan, president of McMillan Analysis. "A second scenario is more problematic: a sharp selloff in stocks, causing VIX to jump up to VXN's higher levels."

The S&P 500 closed flat at 7,483.24, masking one of the quarter's most aggressive sector rotations. The Dow Jones Industrial Average surged 594.83 points, or 1.14%, to a record near 52,900, while the Nasdaq Composite fell 0.80% to 25,832.7 and the Nasdaq 100 dropped 1.61% to 29,329.21. Healthcare gained 2.63%, consumer staples rose 2.03% and utilities added 2.21%, while technology slumped 2.71%. The VIX fell 2.23% to 16.22 even as the divergence with VXN widened.

A similar divergence in late July and early August 2024 preceded a VIX explosion that sent the fear gauge above 65, exacerbated by illiquid S&P 500 options markets. With the S&P 500 trapped in a triangle formation between support at 7,300 and resistance at 7,600, a breakdown below the lower bound could trigger the convergence that volatility traders are hedging against.

The divergence comes as the June nonfarm payrolls report showed the economy added just 57,000 jobs, roughly half the 110,000 consensus estimate, triggering a rotation out of growth and into value. The unemployment rate fell to 4.2% from 4.3%, but only because the labor force participation rate dropped to 61.8% from 61.5%. Average hourly earnings rose 0.3% month over month, in line with expectations.

Advancing stocks edged decliners 49.1% to 47.4% on the NYSE, with 372 new 52-week highs against 74 new lows. About 54.8% of stocks traded above their 50-day moving average. The U.S. 10-year Treasury yield stood at 4.49%, while gold jumped 2.3% to above $4,124 an ounce and Bitcoin rose 2.33% to $61,362 — all three assets rallying on the same dovish rate narrative.

Semiconductor selloff deepens

The technology rout was led by memory semiconductors, which suffered their worst two-day stretch in more than a month. SanDisk plunged 14.20%, KLA Corp. fell 11.51%, Lam Research dropped 10.14% and Western Digital slid 9.92%. The VanEck Semiconductor ETF fell 4.54%, following a 5.40% decline Wednesday, eroding some of the sector's 94% first-half gain.

Tesla fell 7.64% even after delivering 481,126 vehicles in the second quarter, well above the 406,000 consensus estimate — a selloff analysts attributed to profit-taking and broader growth-to-value rotation rather than company-specific weakness. Apple rose 4.66% in its best session relative to the S&P 500 since June 2024, with no single catalyst identified.

Hedging activity picks up

Equity-only put-call ratios continued to rise, keeping their sell signal in place. McMillan recommended buying UVIX August 21 calls at the 95 strike for $5 or less, noting that a doubling of the VIX to 30 would likely push UVIX well above the strike price even accounting for the negative drag of futures contango.

The VIX-related buy signals for stocks remain in place as long as the fear gauge does not close above 19 for two consecutive days. Volatility derivatives term structures slope upward, with VIX futures trading at a premium to spot VIX — a configuration typically bullish for equities.

This article is for informational purposes only and does not constitute investment advice.