Strategists Warn: Gamma Is Extremely Unstable! US Stocks' "Ultra-Low Correlation" Faces Risk of Severe Turbulence

The US stock market has exhibited a rare pattern of low correlation this year, but this calm facade is facing potential shocks.

Simon White, a macro strategist at Bloomberg, warns that the current abnormal volatility in Gamma is undermining the ability of option dealers to suppress market volatility. Once Gamma turns negative rapidly, stock correlation could surge abruptly, plunging the market into a state of higher volatility.

Currently, the S&P 500 Index is less than 1% away from its recent highs, and the index level remains calm. However, over the past month, market style has quietly shifted: capital has moved from previously leading sectors like semiconductors to previously lagging sectors such as SaaS, causing a significant narrowing in dispersion among individual stocks and sectors.

On the surface, this appears to be a normal market rotation, but it implies that the market structure supporting low correlation is changing.

Low Correlation Is Loosening, Gamma Could Become the Volatility "Switch"

US stock correlation is at historic lows this year, largely because a few mega-cap stocks dominate index performance. Meanwhile, the AI rally has significantly boosted individual stock volatility, making it markedly higher than the overall index volatility. The high divergence in individual stock performance has, paradoxically, suppressed correlation among stocks.

However, this pattern is not stable. As capital shifts from AI core beneficiary sectors like semiconductors to lagging sectors such as SaaS, market dispersion has narrowed rapidly in recent weeks. Although the index has not yet shown significant volatility, the divergence between sectors is weakening, making the foundation of low correlation fragile.

The real focus should be on Gamma. When Gamma is positive, option dealers typically buy during market declines and sell during rallies; this hedging behavior can absorb some market volatility. However, when Gamma turns negative, the hedging direction reverses. Dealers may sell during declines and buy during rallies, thereby further amplifying market moves.

Currently, market Gamma remains positive and relatively high. However, White points out that the volatility of Gamma itself this year has been exceptionally prominent, second only to the post-pandemic period from 2020 to 2022.

This means that the seemingly stable market does not imply lower risk. On the contrary, once the structure of option positions changes, Gamma could quickly transform from a force that stabilizes the market into one that amplifies volatility, pushing the market rapidly from a low-volatility, low-correlation state to a high-volatility state.

A 3% to 4% Correction Could Serve as a Stress Test

Rising correlation is not exclusive to market downturns. White notes that there have been historical instances where the market rose, Gamma was negative, and correlation increased simultaneously, although such cases are relatively rare.

Therefore, the primary concern now is not the market direction itself, but the sudden failure of the low-correlation pattern.

In the current environment, the cost of downside protection is at an abnormally low level, while various mechanical selling mechanisms are clustered below the market. Once the market experiences a 3% to 4% correction, a rapid turn to negative Gamma could further amplify hedging pressure, turning a mild adjustment into more severe market volatility.

In other words, the fact that the S&P 500 is less than 1% below its highs does not mean the market is risk-free. The real risk may be hidden beneath the index's calm surface: once the "volatility switch" of Gamma is triggered, the current low-correlation US stock market may be more fragile than it appears.