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Introduction

Rage Bound. Get it? The index has been rangebound for months, but beneath the surface, individual instruments are trading with real aggression. A weak joke, perhaps — but an accurate description of the current tape.

We’ve been writing about the dispersion trade for weeks, and now the broader market is finally catching on. Capital is actively expressing this theme, widening correlation gaps and reinforcing the bifurcation we’ve been highlighting. As we’ve discussed at length, dispersion-driven rebalancing can destabilize markets built on leverage and risk-parity constructs.

And yet, despite the growing internal turbulence, the major indexes have gone essentially nowhere for roughly six months.

Our February 4th report — “Disperse. Nothing to See Here.” — first leaned into this theme. We followed that with our February 11th note, “Calm Surface, Chaos Below,” which reinforced the growing divergence beneath index-level stability. Now, unsurprisingly, the media is beginning to catch up.

A few Bloomberg headlines from this weekend:

We even saw this headline hit our inbox from a well-known market blogger:

While we’re not highlighting this to toot our own horn for being early, decades of market experience tell us that once a phenomenon becomes widely understood, it’s often closer to the end than the beginning.

The whipping post for the dispersion trade continues to be software. On Friday, another seemingly innocuous development added fuel to the fire. Anthropic introduced an add-on tool — Claude Code Security — designed to autonomously detect software vulnerabilities and propose fixes. The result? Billions in market cap erased from a segment many investors believed was insulated from AI disruption: cybersecurity software.

Whether the reaction is justified isn’t for us to decide. But the message from price action is clear — no corner of the market is immune.

The Global Cybersecurity ETF (BUG) fell another 5% on Friday and is now down more than 30% from its June peak. The decisive break of the uptrend line from the COVID lows, combined with a loss of the 200-day moving average, has triggered aggressive de-risking. Friday’s decline also pushed the ETF below its August ’24 low.

Unfortunately, technical breaks of this magnitude rarely resolve quickly. Even in the best-case scenario, these structures typically require time before buyers regain confidence.

However, last week’s weekly DeMark 9 buy may help establish a near-term floor for the group. Notably, the prior weekly DeMark 9 sell correctly marked the June peak.

One thing is clear: until these headlines stop triggering adverse reactions in once-stable businesses, risk appetite will continue to erode, driving further crowding into the perceived AI winners.

The scramble to identify winners and losers in the AI trade has pushed one-year implied dispersion to its highest level since the Global Financial Crisis, according to SG Cross Asset Research.

The extreme dispersion we’re witnessing has contributed to the narrowest start-of-year trading range since the 1960s, according to Barclays. Single-stock volatility is now roughly seven times that of the broader market — the widest divergence in at least 30 years, also per the firm.

We’ve consistently urged investors and traders to do less — maintaining a tactical bias of buying weakness and selling strength. The tightly rangebound market has validated that approach, as even professional managers struggle to generate incremental returns.

This back-and-forth wrangling has left both the SPX and Nasdaq pinned near neutral. If not for the Mag 7 resurgence on Friday, the SPX would likely be flat on the year.

The media will frame this as a stock picker’s market — and in many ways, it is. But it’s also a market where avoiding AI-disrupted industries matters just as much, as tail risks are emerging rapidly across previously stable segments.

The second-order effect of this constant push and pull is a gradual erosion of confidence. Markets are built on confidence, and when that foundation weakens, dislocations can unfold quickly.

Historically, major dislocations compress dispersion and drive correlations higher. Below is a chart of the 1-year rate-of-change in SPX correlations. Notice that during periods like the COVID crash and the 2022 bear market, correlations tightened meaningfully. Today’s regime remains low by correlation standards, implying that any meaningful dislocation could prove especially painful for investors.

Hedge funds have been net sellers of U.S. equities month-to-date at the fastest pace since last March, according to Goldman Sachs’ prime brokerage desk. In our 2/18 report, we highlighted BofA data showing clients dumping U.S. stocks, with single-stock outflows reaching $8.3 billion — the third-largest reading since records began in 2008.

On the other side of the ledger, fourth-quarter earnings season has been solid, with roughly 74% of companies beating estimates.

Speaking of earnings, NVDA reports this week. While the magnitude of this release may have lost some luster given the stock’s trendless performance since July (+1.7% since the start of Q4), investors have increasingly rotated away from large caps amid growing debate over the sustainability of AI infrastructure spending.

Whether NVDA can catalyze the market out of its current malaise remains to be seen.

Geopolitically, another maelstrom may be brewing. Trump’s tariff regime was struck down by SCOTUS, prompting immediate retaliatory tariff announcements over the weekend. Whether those new measures ultimately hold remains unclear, but at the margin, this could be a modest positive — particularly against a slowing macro backdrop (Friday’s GDP report largely underwhelmed).

Separately, the growing probability of a U.S. strike on Iran introduces a new layer of risk that could easily overshadow any near-term positives.

Uncertainty continues to build — never a dull moment.

Let’s see what the charts have to say.