While the recent sharp volatility in global stock markets has been rapidly subsiding since August, driven by a broad tech rally led by semiconductor stocks and the general theme of AI computing infrastructure, option data from the US stock market reveals how quickly investor sentiment can swing between extreme fear and a FOMO-induced bullish greed. The S&P 500's volatility curve shows that with the earnings season winding down and the calendar of major events thinning, traders are generally optimistic about near-term risks. The market prices the S&P 500's daily fluctuation to be significantly below 0.8% for the rest of the month, with NVIDIA's earnings report and the annual Jackson Hole global central bank symposium being the most critical market-watching events.
Meanwhile, the CBOE Volatility Index, also known as the VIX or "fear gauge," closed at its lowest level this year last Friday. As the chart suggests, the S&P 500 may see larger swings around the NVIDIA earnings and Jackson Hole events. Note that implied volatility is calculated based on listed S&P 500 index options. It is crucial to note that a low VIX does not equate to low market risk. Short Gamma, Call FOMO (the frenzy for call options driven by the fear of missing out), and rapid position flipping mean that the stronger the bull market, the more sensitive these short-term volatility amplifiers become.
Where to start
In the view of some cautious Wall Street strategists, these prominent bullish indicators actually harbor the potential for increased short-term market instability. However, for top-tier hedge funds and most seasoned strategists, the medium-term outlook remains fundamentally positive, although short-term trading structures could shift to a more cautious stance. The VIX has fallen to a yearly low, and the market's daily volatility pricing for the remainder of the month is below 0.8%. This suggests investors remain generally calm about macro and earnings risks, supported by strong stock market earnings, robust AI investment demand driven by the AI computing supply chain, and the persistent "buy-the-dip" inertia that props up risk assets.
The real cause for concern is the rapid shift from the late July strategy of "buying Puts to protect against a crash" to the August frenzy of "buying Calls to avoid missing the rally." As market makers have moved from a long Gamma to a short Gamma position, this structure forces them to buy into rallies and sell into declines, amplifying volatility in both directions. A rise in volatility does not necessarily signal the end of the bull market, but rather warns that the uptrend remains intact while the market has transitioned from a "stable bull market" to a phase of "high momentum, high sentiment sensitivity, and high tail-risk volatility."
Why just 10 ASX 200 shares?
With Wall Street giants like Morgan Stanley and JPMorgan recently raising their year-end S&P 500 targets to above 8,000 points, and the global high-conviction AI tech deleveraging in July failing to destroy the primary bull market logic – instead completing a reset of positions and volatility – the tech/AI-driven bull market trajectory has been re-established. However, this is no longer a "low-risk, low-crowding" early-stage bull market. The tech-led uptrend has indeed returned, with AI earnings, semiconductor fundamentals, corporate buybacks, and re-leveraging funds forming a rare confluence. Yet, the investment phase has shifted from "buying AI during fear" to "managing an AI portfolio amid extreme FOMO-fueled euphoria." The trend remains positive, but the risk has shifted from fundamentals to positions, Gamma, long-end bond yields, and the tolerance for valuation expansion.
The most dangerous scenario might be the appearance of "too much calm!" In this environment of rapid swings from sell-off fear to FOMO, the calm surface of the US stock market may hide a "volatility bomb." Recently, demand for upside call options driven by FOMO caused short-term option volatility skew to collapse sharply. This is a stark contrast to the widespread buying of index volatility and skew just in late July, when traders were heavily purchasing put options for hedging. This dramatic reversal highlights the market's current fragility: it is increasingly driven by investor sentiment, which is rapidly shifting from "fear of a market decline" to "fear of missing a rally."
Why just 10 ASX 200 shares?
Trend-following long strategies can remain in place, but investors should not mistake the low VIX for low risk. The primary defense needed now is against the possibility that a major catalyst, like the NVIDIA earnings or Jackson Hole, could break the momentum. The Short Gamma mechanism could then amplify an otherwise ordinary pullback rapidly. The market is beginning to display "low surface volatility, high underlying fragility." Just days after buying index volatility and Put protection in late July, investors were frantically buying Calls due to FOMO, causing a rapid reversal in short-term skew. Simultaneously, leveraged ETF rebalancing, short Gamma market maker positions, the contraction of the 0DTE iron condor strategy supply, and low summer liquidity have collectively diminished the market's volatility "shock absorbers."
Furthermore, the S&P 500 Call/Put ratio has risen to one of its most bullish levels in at least four years, short-term Call skew has hit a two-year high, and there have been instances of the index rising while the VIX also climbs – a classic sign of a FOMO option squeeze. Steve Sosnick, Chief Market Strategist at Interactive Brokers Group Inc., stated, "What we are seeing now is a situation where momentum strategies have attracted so much investor capital and so much market attention. We have become extremely sensitive to changes in momentum."
Several technical factors could also make the market more vulnerable to sudden shifts in investor sentiment. These include market makers currently being in a short Gamma state, driven by both S&P 500 index option trading and the rebalancing activities of leveraged ETFs. In a negative Gamma environment, market makers must buy stocks to hedge when prices rise rapidly and sell when they fall, thereby amplifying market volatility. The chart above illustrates the S&P 500 volatility skew.
Meanwhile, strategists at UBS wrote in a recent report that the so-called short-dated iron condor strategy, which was popular earlier this year and helped to significantly suppress intraday price swings, has reappeared on a smaller scale. This could potentially open the door for larger price moves. Relatively subdued market trading activity during the summer months may also amplify market trends. Kieran Diamond, a UBS derivatives strategist, said, "From around the start of August, the positioning landscape for S&P 500 options underwent a rather dramatic reversal. The index rose from an area where market makers were in a long Gamma position to one where they needed to manage short Gamma risk." He added, "This shift was further amplified by record call buying, and one of the most important suppliers of upside options began to step back as the market started to squeeze." He was referring to the previously prevalent iron condor strategy, which had increasingly targeted daily S&P 500 index options.
Christopher Jacobson, co-head of derivatives strategy at Susquehanna International Group LLP, believes the recent trends and directional changes in call skew have been "quite consistent," and noted that option volatility metrics currently appear "very, very cheap." However, Ritik Katte, co-founder and Chief Investment Officer of London-based hedge fund MCD Capital, said that strategies capable of profiting from the rapid shifts in investor sentiment are becoming more popular, alongside intraday momentum trades designed to profit from more dramatic market swings. He stated that his firm is positioning itself "to benefit if a trend breaks out suddenly on either side of the skew." Tanvir Sandhu, Chief Global Derivatives Strategist at Bloomberg Intelligence, said, "On the surface, global stock markets appear remarkably calm. But beneath the surface, the market is anything but static: skew, Gamma, and option positions are changing rapidly."
"The bull market is back, and so is the gambling mentality!" AI earnings, trillion-dollar buybacks, and FOMO are firing simultaneously. The July semiconductor sell-off is morphing into a new global tech primary uptrend. Morgan Stanley previously raised its S&P 500 target for the end of 2026 to 8,000 points and for mid-2027 to 8,300 points, based on positive operating leverage, the broader adoption of frontier AI tech by global enterprises, pricing power, and a continuously expanding AI capital expenditure cycle. Goldman Sachs also sees 8,000 points, JPMorgan raised its target from 7,800 to 8,000 on August 10, raising its 2026/2027 EPS estimates to 365/420 dollars, and Citi sees 8,100 points. JPMorgan particularly emphasizes that the AI-related cloud business acceleration and order backlogs and cash flow visibility of tech giants like Alphabet, Amazon, and Microsoft are proving that AI CapEx is beginning to convert into real revenue. This suggests the market is moving from "believing the AI story" to a phase of validating AI's return on invested capital (ROIC).
The most convincing confirmation signal comes from the semiconductor market, which suffered the most severe liquidation in July. The AI computing hardware 'Beta' that fell the hardest is now leading the charge. The Philadelphia Semiconductor Index (SOX) plunged nearly 29% from its record high on June 22 to its low on July 29. However, it has since rebounded about 20% from that low as of August 13, taking only about 19 trading days to approach the end of a technical bear market. South Korea's KOSPI index, heavily weighted by SK Hynix and Samsung, surged more than 20% from its late July low, and in the week ending August 14, it surged another 11.5% to 6,977.94 points, re-entering a technical bull market. The July sell-off in Korea involved significant forced deleveraging of leveraged ETFs, with product sizes falling from roughly $50 billion to $17 billion. However, the fundamental AI-driven super-cycle for memory chips (DRAM/HBM) did not collapse simultaneously; the industry continues to discuss supply tightness and demand deficits into 2027. Therefore, this AI-led bull market increasingly resembles a positive feedback loop of "deleveraging – position reset – risk re-taking – rising FOMO," rather than a dead-cat bounce following the peak of an AI earnings cycle.
Evidence of fund flows from another Wall Street giant, Citadel, suggests this rally has moved from "fundamental repair" to a "self-reinforcing buying" phase. Their official August report shows that S&P 500 Q2 EPS growth was about 33%, with one of the steepest earnings upgrade paths since at least 2000. Simultaneously, while the index is at record highs, the 12-month forward P/E has fallen from about 23.1x in October last year to 20.1x, indicating that the index is being driven primarily by earnings expansion, not multiple expansion. More importantly, Citadel's calculations show that systemic deleveraging has matured, retail investors are net buyers again, year-to-date ETF inflows are around $1.6 trillion, over $1 trillion in corporate buyback authorizations have re-entered the execution window, over 70% of S&P 500 components are above their 200-day moving average, and the low volatility is beginning to release risk budgets for systematic strategies like CTAs and risk parity. This effectively forms a classic bull market positive feedback loop: earnings upgrades – stock prices rise – volatility falls – systematic funds add positions – passive funds and buybacks absorb supply – underweight funds chase the rally. This complements the deleveraging bull market positive feedback mentioned above.
However, as the option data suggests a US stock market with "low surface volatility, high underlying fragility," the microstructural fragility of the bull market itself warrants investor attention. The VIX has fallen to its yearly low, and the market prices the S&P 500's daily swing for the rest of the month at less than 0.8%. Yet, on August 4th, the volume of SPX Call options hit a record high, nearly double the daily average of the past year, with nearly 35% of S&P 500 components showing a 3-month Call skew inversion. At the same time, after market makers moved from a long Gamma to a short Gamma region, they are forced to buy into rallies and sell into declines. Therefore, FOMO can create a melt-up but will also amplify the impact of the next negative catalyst. The tech-led bull market has indeed returned, but the investment phase has shifted from "buying AI during fear" to "managing AI positions during the FOMO frenzy." This is highly consistent with Morgan Stanley's latest proposal of a rotation from "early-cycle beta diffusion to mid-cycle quality rotation," where the true winners going forward will not just be "any stock riding the AI wave," but those companies that can convert AI growth into profit margins, free cash flow, and ROIC.
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