Despite low volatility, investors suddenly accelerated their buying of disaster insurance to protect against a surprise crash
Markets look deceptively calm.
After a brief pause in June and July, U.S. stocks have resumed their pattern of jumping from record high to record high. As investors go all in on chasing a FOMO rally, Wall Street's "fear gauge" has dropped to its lowest level since January. Meanwhile, demand for put options that allow investors to protect their portfolios from a drawdown has eased.
Yet that has some worried that investors might be too complacent for their own good in the face of myriad risks.
The S&P 500 SPX tallied a fresh record finish on Thursday. However, the Cboe Volatility Index VIX - the aforementioned fear gauge, better known as the VIX - rose. The unusual dynamic signals that this latest sprint higher for stocks might be looking overdone, as MarketWatch has previously reported.
Before rising Thursday, the VIX was trading at its lowest level since early January. The index fell as low as 14.39 on Wednesday, FactSet data showed.
The unusual sense of calm even extended to South Korea, which recently saw its stock market KR:180721 endure the most volatile episode in its history, as local investors piled into leveraged products to chase a runaway rally in hot memory stocks like Samsung Electronics (KR:005930) and Sk Hynix (KR:000660) $(SKHY)$.
South Korea's Kospi 200 Volatility Index, which is its stock market's equivalent to the VIX, has also fallen over 34% this month to its lowest level since April 30, according to FactSet data.
The Cboe Skew Index, which measures investor demand for crash protection, also recently hit a notable low. On Aug. 4, the index touched its lowest level of 2026, according to Bloomberg data. The low reading suggests the cost of crash protection covering the next 30 days has reached relatively attractive levels, due to light demand.
To be sure, investors have reasons to be feeling optimistic. Wall Street is coming off another blockbuster earnings season, and analysts' expectations for the rest of 2026 and beyond have continued to improve. Rising earnings forecasts have even outpaced gains for stocks at the index level, FactSet data showed.
But some on Wall Street have flagged plenty of reasons for caution as well. The conflict with Iran has continued to drag on, looming over the global economic outlook. Concerns about Federal Reserve independence and the likely return on massive artificial-intelligence investments are lingering in the background. More recently, rising global bond yields have also raised the stakes for stocks, noted Michael Kramer, portfolio manager at Mott Capital Management.
Certain technical indicators are also suggesting that volatility could soon pick up again, Kramer said. As stocks have shot higher over the past two weeks, the gap between realized volatility and implied volatility has narrowed to the low end of its recent range.
"Realized volatility and implied volatility are getting really tight, and there's probably not much room for them to tighten further," he said.
September is also historically the weakest month of the year for S&P 500 returns, an analysis from Dow Jones Market Data showed.
Word of caution
Indeed, low readings on popular volatility gauges could suggest that risk is building up under the surface. A recent pickup in the Cboe Skew Index suggests investors might already be changing their tune, according to an analysis from SentimenTrader.
The analysis, which focused on previous episodes that saw similarly low readings on the VIX alongside large changes in options skew, found that in the past, declines for stocks have been relatively muted over the next month.
"When VIX sits below 15 at the bottom of its 126-day range, obvious volatility usually did not arrive immediately, and warnings like a [Cboe Skew Index] surge or a correlation collapse did not clearly change the path of the first few weeks," said analysts at SentimenTrader in a Thursday client note.
Yet they also offered a word of caution: "This is not a no-risk state but one where risk can be delayed, and the worst case may well fall harder after its buffer period. The risk warnings can fire first, and price instability often arrives a step later."
All three major U.S. equity indexes have staged a strong rebound in August from their sharp selloff in the previous two months - with megacap technology names XX:SP500.45 leading the gains, while cyclical names such as stocks from the S&P 500's materials XX:SP500.15 and industrials XX:SP500.20 sectors have also buoyed the market.
The S&P 500 has risen 4.1% so far this month, while the Dow Jones Industrial Average DJIA was up 2.6% and the Nasdaq Composite COMP has popped 5.6%, according to FactSet data. This comes on the heels of back-to-back monthly declines for the S&P 500.
In the view of Stephen Innes, managing partner at SPI Asset Management, the stock market in August is rebuilding exposure after the selloff last month, but "not in a way that has removed the instability."
"Investors are still carrying downside hedges while simultaneously trying to repair underexposure to the rally," he said in emailed commentary on Thursday. "The result is a market that may not own enough upside if the squeeze extends and may not own enough downside protection if the next catalyst breaks the other way.
"That is why the calm feels deceptive," Innes added. "The market does not need a huge new fundamental shock to move quickly from here. It may simply need the next catalyst to hit the wrong part of the positioning map."
Or as Walter Deemer, a veteran technical analyst, put it in a post on X: The market has "nothing to fear but the lack of fear itself."
Joseph Adinolfi contributed.
-Isabel Wang
Comments