As AI concept stocks dominate the gains, the divergence within the U.S. stock market has become extremely severe.
Written by: Zhang Yaqi
Source: Wall Street Watch
The bullish sentiment in the U.S. stock market has spread to the options market, with a key indicator falling to its lowest level in nearly four years, closely matching the level seen just before the onset of the bear market in 2022, prompting market participants to issue cautious warnings.
According to Dow Jones market data, the five-day moving average of the Cboe equity put/call ratio dropped to 0.452 last Friday, the lowest since March 30, 2022, indicating that investor demand for call options is more than double that for put options. Mark Arbeter, president of Arbeter Investments, told MarketWatch that this reading is "historically very low," and although it is not yet a direct sell signal, it is enough to make investors alert. He believes this reflects that retail investor sentiment has become overly euphoric under the influence of the AI frenzy.
The last time this indicator reached similar levels was during the peak of the initial rebound in the early stages of the 2022 bear market; earlier instances occurred around the market peak at the end of 2021. Both historical precedents were followed by sustained declines in the stock market. Meanwhile, Mandy Xu, head of the Cboe derivatives market intelligence department, pointed out that while the overall market volatility index VIX continues to decline, the implied volatility of individual stocks has surged significantly, with related spreads expanding to historical records, revealing a high degree of divergence within the stock market.
However, beneath the warning signals, bullish momentum remains strong. On Monday, the S&P 500 index, the Dow Jones Industrial Average, and the Nasdaq Composite Index all refreshed their historical closing records. According to Dow Jones market data, the S&P 500 has recorded 23 historical high closes so far this year.
Put/Call Ratio Falls to Four-Year Low
The five-day moving average of the Cboe equity put/call ratio closed at 0.452 last Friday, the lowest since March 30, 2022. Mark Arbeter pointed out that this value indicates that investor demand for call options is more than twice that of put options, placing it in an extremely low range in historical terms.
The 21-day moving average of the indicator also moved downward, falling to 0.493 last Friday, a new low since December 9, 2021 (when it was 0.490). Mark Arbeter said that as long as this average remains in a "downward trend", the stock market may still have room for continued gains, but the trend itself is already evidence of market overheating.
It is worth noting that put options can serve as directional tools betting on market declines or as portfolio hedges. When investors aggressively buy call options while the demand for hedging drops sharply, it often indicates that market risk appetite has approached extreme levels.
Historical Precedents Point to Pre-Bear Market in 2022
Mark Arbeter reviewed history and found that the last time the five-day moving average reached similar levels was during the first "counter-trend rally" of the 2022 bear market; looking back further, similar readings also appeared during the market peak stage at the end of 2021.
After these two historical points, the U.S. stock market entered a sustained downward cycle, providing a reference for the warning signals conveyed by the current indicators. Mark Arbeter also emphasized that it does not constitute a clear sell trigger point at present, but historical experience is sufficient to remind investors to exercise restraint when chasing increases.
Internal Divergence in the Stock Market Intensified, AI Concepts Dominate Gains
In contrast to the overall calm appearance of the market, significant internal divergence is occurring within the stock market. In a report released on Monday, Mandy Xu pointed out that the single-stock volatility measured by the VIXEQ index approached a one-year high last week, and the spread between it and the VIX has widened to historical records. This is the latest signal indicating that the internal divergence of the stock market has reached a very high level in the past two months—stocks related to artificial intelligence have dominated much of the gains in the S&P 500 index.
On Monday, the S&P 500 information technology sector surged about 2.5%, becoming the core support for the index reaching historical highs again. FactSet data showed that out of all 11 sectors of the index, only the technology and energy sectors rose that day, while the majority of other sectors declined.
The rise in the energy sector is related to geopolitical disturbances. Reports indicate that Iran stopped its peace negotiations with the United States and sought a complete blockade of the Strait of Hormuz—this key waterway for oil and gas exports in the Middle East—driving international oil prices higher. However, U.S. President Trump responded on social media on Monday afternoon, stating, "Negotiations with the Islamic Republic of Iran are still progressing rapidly."
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