Wall Street’s “fear gauge” rose on Tuesday as the S&P 500 and other major U.S. equity indexes touched their lowest levels of the year, before an afternoon rebound saw them recoup much of their earlier losses.
Stocks received an additional boost in afternoon trading after President Trump said the U.S. Navy would help escort oil tankers through the Strait of Hormuz, and that the U.S. government would provide insurance to ships as well.
Earlier on Tuesday, the Cboe Volatility Index, better known as the VIX or Wall Street’s “fear gauge,” had briefly risen above 28, touching its highest level intraday since Nov. 20, Dow Jones Market Data showed. But as the closing bell approached, the index started to calm down as early losses for stocks eased. The S&P 500 had been down roughly 2.5% at the day’s intraday low, hit shortly after the opening bell, but ended up closing down 0.9%.
Whenever markets encounter turbulence, investors turn their attention to the VIX. The fear gauge, which was launched in 1990 by Cboe Global Markets, uses trading in the options market tied to the S&P 500 to impute how volatile investors expect the index will be over the coming month or so.
The VIX is widely seen as a counterindicator: The higher it climbs, the higher the likelihood that any selloff in stocks is nearing its end. Readings above 30 are pretty rare; since Jan. 1, 1990, the VIX has finished above 30 on less than 1% of trading days. It has finished above 80 on only three occasions — just 0.03% of the time, according to Dow Jones Market Data.
When looking for a sweet spot to buy back into stocks, Nicholas Colas, co-founder of DataTrek, told MarketWatch that seeing the VIX close at 27.5 or above is as a solid rule of thumb. In the past, when the VIX has finished above that level, stocks were higher one year later more than 70% of the time, Colas told MarketWatch.
He believes a close above 27.5 is an important indicator, even if previous short-lived ructions in October and November saw the VIX only briefly cross above this threshold intraday.
“The math I’ve done really hinges on the 27.5 level,” Colas told MarketWatch.
When it comes to assessing the level of panic in the market, Colas said it could be helpful to look past the VIX. One sign that suggests investor sentiment has taken a turn is the fact that all 11 sectors of the S&P 500 were in the red for much of Tuesday. Heading into the close, only the financials and communications-services sectors were fighting to go green — though all 11 sectors ended trading in the red Tuesday.
This is a particularly significant sign, especially following the stretch of wide dispersion that investors had been seeing since the start of 2026. Prior to this week, the S&P 500 had been struggling to break out to new highs as investors sold market-leading software stocks and other highflying names, and rotated into consumer staples and other sectors like energy and materials that had previously lagged.
Now, everything is heading lower, more or less in lockstep. What’s more, global stocks are doing even worse than the U.S. market, after outperforming their U.S. rivals all year. That means investors are really spooked, Colas said.
“When everything is going down, as it is today, you know the market is getting really fearful,” he told MarketWatch. “When you get real risk in the market, nothing works. Because we have a real inflation worry right now, not even bonds are working as a risk hedge.”
Term structure
A whole term structure has sprung up around the VIX, allowing investors to hedge their positions with VIX futures that expire once each month. Contracts covering much of the year ahead can generally be traded.
Typically, contracts with a longer lifespan trade higher than those due to expire sooner. But for a brief moment on Tuesday, the front-month VIX futures contract traded above the contract due to expire the following month. This caused the VIX futures curve to invert.
Matt and Mike Thompson, co-CIOs at Little Harbor Advisors, said this has in the past reliably signaled a bottom in stocks: “That’s a bigger tell about what is happening than just looking at the VIX itself.”
Jonathan Krinsky, a strategist at BTIG, pointed out in a report shared with MarketWatch that the degree of the inversion between the spot VIX and the futures contract two months out had earlier touched its highest level since last spring.
BTIG
“Certainly room to widen further, but an inverted curve is one sign that the selloff is likely in the later innings,” Krinsky said in commentary shared with MarketWatch.
More to the story
Looking at the VIX in isolation offers insight into investors’ expectations surrounding how volatile stocks are expected to be over the coming month.
To translate the level of the VIX into a forecast for how volatile investors expect the S&P 500 will be over the coming month, investors can use the “rule of 16.” As the Thompson brothers explained, investors simply divide the level of the VIX by 16; that leads to a rough estimate of the average intraday swing in the S&P 500 currently being priced in by the options market.
It also might help to look at other volatility gauges. Noel Smith, chief investment officer at Convex Asset Management, said he pays close attention to volatility measures for bonds, currencies and the price of oil.
“There are a lot of things to consider,” Smith said. “All the volatility curves kind of inform each other. It’s hard for bond volatility to go bananas and not bleed into equity volatility.”
And volatility in the bond market has indeed been rising lately. The ICE BofA MOVE Index stood at 73 at last check, according to LSEG data. That would be its highest level since late last year. Rising Treasury yields on Tuesday will likely push it higher still: The yield on the 10-year note was up 1 basis point at 4.052%, as an earlier jump faded.
The Dow Jones Industrial Average closed down 403.51 points, or 0.8%, at 48,501.27, after falling more than 1,000 points earlier in the session. The S&P 500 was off by 0.9% at 6,816.63, while the Nasdaq Composite shed 1% at 22,516.69, FactSet data showed.
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