Strategists warn: Gamma is extremely unstable! U.S. stocks with "ultra-low correlation" are facing the risk of violent shocks

The US stock market has shown an unusually low-correlation pattern this year, but this calm facade is facing potential shocks.

Bloomberg macro strategist Simon White warns that the current abnormal volatility in Gamma is weakening options traders' ability to suppress market swings. If Gamma quickly turns negative, stock correlations could abruptly surge, pushing the market into a higher volatility regime.

The S&P 500 index is currently less than 1% away from its recent high, and appears calm at the index level. However, over the past month, the market style has quietly shifted: funds have rotated out of previously leading sectors such as semiconductors and into laggards like SaaS, causing the dispersion between individual stocks and sectors to noticeably narrow.

On the surface, this looks like a routine market rotation, but underpinning it is a change in the very market structure supporting low correlations.

Low correlation is weakening, Gamma may be the volatility "switch"

A key reason for the historically low correlation in US stocks this year is that just a few mega-cap stocks have dominated index performance, while the AI rally has pushed individual stock volatility much higher than overall index volatility. Highly divergent individual stock performance has, counterintuitively, suppressed correlations between stocks.

But this structure is far from stable. As funds shift from AI core beneficiaries like semiconductors to lagging sectors like SaaS, market dispersion has recently narrowed rapidly. Although the index hasn't shown significant swings, the underlying sector divergence is fading, undermining the foundation for low correlation.

The real focus should be on Gamma. When Gamma is positive, options traders generally buy during market drops and sell during rallies, with their hedging absorbing some volatility; but when Gamma turns negative, hedging reverses direction—traders may sell into declines and buy into rallies, thus amplifying moves further.

Currently, market Gamma remains positive and relatively high, but White points out that this year's Gamma volatility is unusually elevated, second only to the post-pandemic period of 2020–2022.

This means today's seemingly steady market does not equal low risk. On the contrary, if the structure of options positions changes, Gamma could in a short time shift from a stabilizing market force to one that amplifies swings, causing a swift transition from low volatility, low correlation to high volatility conditions.

A 3% to 4% correction could trigger a stress test

Rising correlations don't only occur during market downturns. White notes that historically the market has occasionally risen while Gamma is negative and correlations are simultaneously surging, although such scenarios are rare.

Therefore, the key risk right now isn't market direction per se, but the sudden breakdown of the low-correlation regime.

In the current environment, downside protection costs are unusually low, yet multiple mechanical selling triggers are clustered below the surface. If the market sees a 3% to 4% pullback, a rapid Gamma reversal could further amplify hedging pressure, turning a mild correction into much more pronounced volatility.

In other words, the fact that the S&P 500 is less than 1% from its peak does not mean there is no risk. The real risk may be lurking beneath the apparent calm: if this "volatility switch" in Gamma is flipped, today's low-correlation US stock market could turn out to be much more fragile than it seems.