付鹏 Says S&P 500 Drawdown Split Could Lift Market Volatility

U.S. stock volatility could rise sharply if the S&P 500’s largest members start to fall after supporting the index while many other shares retreat, 付鹏 said.

His warning centers on the difference between drawdowns in the equal-weighted S&P 500 and the usual market-cap-weighted index. The standard index gives its biggest companies more influence, so their strength can mask declines across a wider group of stocks.

付鹏 said passive investment and concentrated holdings have helped keep heavyweight shares elevated. Many other stocks have undergone deeper technical pullbacks, leaving the broad index looking steadier than the market beneath it.

He considers a 4% to 6% gap between the two indexes’ drawdowns a historical extreme that often signals market breadth is close to its limit. Market breadth describes how widely stocks participate in a market move. He said the recent split has reached a critical point.

At that point, even a modest pullback in the largest stocks could produce a sharp rise in the VIX volatility index, he said. He described rising volatility as part of the adjustment to the market’s imbalance.