What to make of this very weird market

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Stocks are swinging about as though there’s a full-blown crisis, while the S&P 500 is just 2% from its high. One way to measure the scale of moves is to look at sectors. The gap between the three best-performing sectors over six weeks and the three worst has rarely been bigger, and usually during some sort of panic.

At least in data back to the mid-1990s, it’s highly unusual that sectors should diverge so much yet the index stay so stable. The last time the sectors diverged so much was just before Silicon Valley Bank’s collapse prompted a global banking panic and federal rescues. Before that was the rebound from the first lockdown low.

And before that was during the global financial crisis of 2008-09 (earlier the dot-com bubble and its aftermath saw a series of bigger sector swings). Those who just buy the market might not even have noticed anything strange. After all, the average stock in the S&P is flirting with record highs.

This year the S&P is virtually unchanged, while the energy sector is up 22%, boring consumer staples up 13% and financials down 4%. The oddity shows up in the options markets too. The implied dispersion of stocks, how much they are expected to move relative to each other, is very high, as Tim Edwards, head of index investment strategy at S&P Dow Jones Indices, points out.

Dispersion of stocks has only once been higher when implied volatility, measured by the Vix, is so low. That was in October last year, when there was a rush for Big Tech and all manner of super-risky stocks popular with individual investors, before those trades went into sharp reverse. What to make of it all? There are three ways to treat such a strange