Narrow US stock market rally at risk from volatility spike

The S&P 500 rose 1.7 percent last week, ending at a record high.

Sven Henrich, founder and lead market strategist at NorthmanTrader, noted that the stock market's rally to all-time highs has been accompanied by falling volatility as measured by the CBOE Volatility Index or VIX.

“The VIX follows some very specific patterns that show compression,” he told CNBC on Friday, pointing to a series of lower highs and lower lows in the VIX.

Henrich said that when volatility “compresses too much, then we see these spikes” in the VIX.

Henrich added that the Federal Reserve's monetary policy decision this week, widely expected to be a rate cut, could be the trigger for such a spike.

Henrich also said that “while we see the Nasdaq making new highs, there’s no visible expansion in new highs versus new lows in these indicators”, indicating that “participation [is] waning in favor of a few individual stocks on the Nasdaq”.

Brendan Coffey at Forbes made a similar point for the market as a whole.

Coffey noted that the Russell 2000 has started lagging the S&P 500 “by an unusually wide amount”.

He said that it is “still a bull market, but there are signs it may be going to pasture”.