The long-silent "fear index" soared, signaling a potential major shake-up in the US stock market?

According to Zhitong Finance, facing political uncertainty, risks from large tech company earnings reports, and seasonal weakness, investors are seeking portfolio protection to cope with the potential difficult trend in the U.S. stock market. The Cboe Volatility Index (VIX) surged to its highest level since the end of April last week, rising more than 28% to above the 16 level. This index is known as Wall Street's fear gauge, as it measures the demand for protection against market volatility.

U.S. Stocks Calm for a Long Time, Haven't Fallen Over 2% in a Single Day for a Long Time

The excitement brought by the artificial intelligence boom and gradually cooling inflation has driven the S&P 500 index up nearly 17% so far this year. Along with this rise is one of the most stable trading periods in recent times: the benchmark index has not experienced a single-day decline of 2% or more for 355 consecutive trading days, the longest streak since 2007.

However, the situation may change. Despite a rebound in U.S. stocks on Monday, there are signs that investors are increasingly concerned about risks ranging from tech company earnings to the U.S. presidential election. Options market bets indicate that investors expect the calmness of the market to be tested in the coming weeks. The Cboe Volatility Index surged to its highest level since the end of April last week, following the sell-off in tech stocks, leading to the second largest weekly decline in the S&P 500 index since 2024. This index is known as Wall Street's fear gauge, as it measures the demand for protection against market volatility.

Joe Tigay, portfolio manager of the Rational Equity Armor Fund, said: "We have seen people realizing the fact that volatility may occur. However, they seem to have not fully adjusted their positions yet."

Investors Worry About Giant Companies' Earnings Causing Turbulence

One potential factor causing market volatility could be the upcoming earnings reports of leading tech and growth companies. First, heavyweight companies Tesla (TSLA.US) and Alphabet (GOOGL.US) will announce their performance after the U.S. market closes on Tuesday. Weaker-than-expected performance could prompt investors to withdraw capital from tech giants and invest in underperforming market sectors this year, further driving the so-called rotation trading. Last week, tech stocks fell while small-cap stocks and other lagging sectors surged.

Even the darling of the artificial intelligence field, NVIDIA (NVDA.US), is being viewed cautiously by investors. NVIDIA's stock price has risen 138% so far this year; Trade Alert data shows that the ratio of put options to call options for the stock reached 0.74:1 last Friday, the highest defensive level in about two months.

Over the past 10 trading days, the Russell 2000 index, which is mainly composed of small companies, has risen by 9%, while the Nasdaq 100 index, which is mainly composed of tech stocks, has fallen by 3%, mainly due to the increasing expectations of a Fed rate cut and capital inflows driven by Trump's trade push.

Michael Thompson, co-portfolio manager of Little Harbor Advisors, a small investment firm, said that the dominance of tech stocks in the market this year has led people to compare it to the turbulent internet boom over 20 years ago, raising concerns that tech stocks have become vulnerable to sell-offs Thompson said, "Trading in mega-cap stocks driven by the artificial intelligence theme has been ongoing for some time. Overall, the market seems to have... ushered in some kind of mean reversion." His fund has recently been closing out some positions for profit.

Election risks compounded by seasonal factors, market concerns rising

Seasonal factors and the anxiety of an election year may be another catalyst for market volatility, with September and October typically being the most volatile months for the U.S. stock market. The VIX index averaged 21.8 in October, closing at 14.9 on Monday. According to data from LSEG since 1992, this ratio rises to 24.8 in election years. October VIX futures are currently at the highest level for all contracts between August 2024 and January 2025.

Analysts at Deutsche Bank stated that the U.S. presidential competition is more intense and unpredictable, which could increase market uncertainty and put pressure on the stock market. On Monday, online betting site PredictIt showed odds of 60 cents for Trump winning and 39 cents for Harris winning.

Volatility index futures show that investors are bracing for increased volatility around the U.S. presidential election. Several incidents so far this year have reflected that 2024 is one of the most dramatic election years in history. President Biden, under increasing pressure from his Democratic colleagues, announced on Sunday that he would not seek re-election, supporting Vice President Kamala Harris as the Democratic presidential candidate to face off against Republican Donald Trump in November.

A significant shift in volatility mechanisms could harm investors who have been heavily buying into trades specifically targeting low market volatility. One of these is known as dispersion trading, where investors seek to exploit differences between index level volatility and single stock option volatility. However, Kris Sidial, Co-Chief Investment Officer of volatility arbitrage fund Ambrus Group, stated that such trades are unlikely to be unwound unless the VIX volatility index is significantly higher than current levels. He said, "When the volatility index (VIX) is in the high 20s, this chain reaction becomes more pronounced."