Author: Jim Paulsen, Financial Analyst
Compiled by: Deep潮 TechFlow
The market fears missing out yet also fears being left holding the bag—what does the unusual movement of the S&P Low Volatility Index reveal?
Overview: The S&P 500 Low Volatility Index has recorded its first-ever anomaly: it rises when the broader market falls, and falls when the broader market rises. This unprecedented price behavior reveals the market's schizophrenic state—investors are both afraid of missing out on the AI rally (FOMO) and afraid of buying at the top (NBO). Historical data suggests this signal often precedes poor performance in the stock market and technology stocks.
The recent unique price movement of the S&P 500 Low Volatility Index suggests that investors are simultaneously experiencing two types of anxiety: fear of missing out (FOMO) and fear of not getting out in time (NBO).
Recently, the S&P 500 Low Volatility Index has set an unprecedented record. Typically, low-volatility stocks rise less when the S&P 500 rises and fall less when the S&P 500 falls. However, over the past six months, low-volatility investments have on average risen on days when the S&P 500 declined and fallen on days when the S&P 500 rose. In other words, daily declines in the S&P 500 have not only allowed defensive low-volatility stocks to outperform by falling less, but have actually pushed their prices higher; conversely, on days when the S&P 500 rose, low-volatility stocks did not just underperform—they actually declined in price.
In my view, the unprecedented extreme price movement of the S&P 500 Low Volatility Index recently indicates that investors are simultaneously caught in dual anxieties—fear of missing out (FOMO) and fear of not getting out (NBO). Historically, the price behavior of low-volatility stocks has often served as a warning signal for the broader market and tech stocks.
What is the S&P 500 Low Volatility Index?
The S&P 500 Low Volatility Index is designed to measure the performance of the 100 least volatile stocks within the S&P 500 Index. Composed of various defensive securities, including high-quality, consistently profitable, dividend-safe stocks with low price betas, it is a classic buy for the risk-averse and a common sell during bullish rallies. Specifically engineered to deliver smaller gains in bull markets and smaller losses in bear markets, it caters to conservative investors seeking market participation while fearing they may miss the exit.
But when low-volatility investments rise during market declines and fall during market rallies, what does this mean? In my view, this depicts a market driven not by excessive bullishness or bearishness, but by investors simultaneously fearful of FOMO and NBO. Excessive bullishness causes low-volatility stocks to underperform, while excessive bearishness makes them winners. Yet when the dual fears of FOMO and NBO are both pronounced, low-volatility stocks anomalously "rise" on down days and "fall" on up days. When FOMO and NBO coexist, market up days bring buying pressure on high-risk stocks alongside selling pressure on low-volatility stocks; meanwhile, market down days trigger selling of high-risk stocks alongside buying of low-volatility stocks.
Performance of the S&P Low Volatility Index on up and down days of the S&P 500
Chart 1 shows the average daily percentage price change of the S&P 500 Low Volatility Index over a rolling 6-month period, since 1990, on days when the S&P 500 rose (blue line) and fell (red line). As illustrated, across nearly all rolling six-month periods, the average percentage price change of the S&P 500 Low Volatility Index was positive when the S&P 500 rose and negative when it fell.
Beyond the current situation, the only other time in history when the six-month rolling low-volatility index price percentage change was positive during S&P 500 daily advances and never negative during S&P 500 daily declines occurred briefly in 2000. Although the low-volatility index has almost always underperformed during S&P 500 rallies and outperformed during S&P 500 declines, apart from the current period, it has never in the past six months risen on all S&P 500 down days and fallen on all S&P 500 up days. In other words, over the past six months, the performance of the S&P 500 low-volatility index has been “unique” compared to any other period since 1990—it has, on average, risen on all S&P 500 down days (red line) while falling on all S&P 500 up days (blue line) over the past six months! This may reflect a landmark, or at least extremely rare, investor mindset or sentiment—my guess is a FOMO/NBO combination.
The low-volatility index's average historical performance on up days minus down days
Chart 2 illustrates this unique pattern in the performance of the S&P 500 Low Volatility Index from a slightly different perspective. It shows the average performance difference over the past 26 weeks between all S&P 500 up weeks and all S&P 500 down weeks. This is the difference between the red and blue lines in Chart 1. As shown, during the modern era, this difference is uniquely negative (i.e., the Low Volatility Index gains less during periods when the S&P 500 rises overall than it loses during periods when the S&P 500 falls).
Although this performance differential has never been negative until today, it frequently fell into the lowest quartile of its historical range (below the green dashed line) near major stock market peaks—such as mid-2000, 2007, 2018, early 2020, and late 2021. It also frequently surged into the highest quartile (above the red dashed line) near major stock market bottoms—such as early 1991, late 2002, March 2009, mid-2020, and late 2022.
FOMO/NBO vs. S&P 500 Future Performance
The difference between the S&P Low Volatility Index's performance on up days versus down days in the S&P 500 signals what future overall S&P 500 performance may look like. Chart 3 highlights that since 1990, the average annualized price gain of the S&P 500 over the following week has been highly sensitive to quartiles of the Low Volatility spread difference. When the Low Volatility spread is in the highest quartile (i.e., above the red dashed line in Chart 2), the S&P 500’s average annualized price gain over the following week reaches a strong 17.26%. When the Low Volatility spread falls within the middle two quartiles, the average annualized one-week future gain drops to 10.12%. Finally, when the Low Volatility spread is in the lowest quartile, the S&P 500’s average annualized one-week future price gain declines to a disappointing 3.92%.
Clearly, the difference in performance of the low-volatility index between periods of overall market gains and losses has historically been important for the future performance of the S&P 500. Essentially, as long as low-volatility investments perform significantly better in rising markets than in falling markets, the S&P 500 typically delivers solid returns. However, when low-volatility investments perform better on down days relative to up days, the future performance of the S&P 500 tends to struggle.
Overall, I believe this metric serves as a proxy for investor sentiment. The performance of low-volatility investments reflects the degree to which investors prioritize risk avoidance. When low-volatility investments begin to outperform significantly in declining markets compared to rising ones, it indicates that investors are placing greater emphasis on capital preservation—namely, their greatest fear is failing to exit in time. And at our current unique juncture—where low-volatility prices turn negative on up days due to FOMO driving investors to sell low-volatility stocks in favor of more aggressive alternatives, while turning positive on down days because bear markets genuinely instill fear of NBO—this suggests a near-schizophrenic anxiety is driving the market.
Finally, Chart 4 shows the performance of the S&P 500’s ten sectors since 1990 (excluding real estate due to its shorter history) when the low-volatility performance spread is in the lowest quartile (blue bars) versus the top three quartiles (red bars). Except for utilities, the lowest quartile results have been particularly favorable for the S&P 500’s old-economy sectors, while new-economy sectors—technology and communication services—typically performed much better when the low-volatility performance spread was in the top three quartiles. Therefore, if the low-volatility spread remains in the bottom quartile, historical experience suggests investors should not only expect underperformance from the S&P 500 but also consider increasing exposure to old-economy sectors and exercising greater caution regarding overweight positions in technology and communication services.
Final comment
This is the first time during this bull market that the new economy trade has shown signs of strain. While the technology and communications sectors continue to lead the market and have recently received a significant boost from AI narratives, market volatility has increased—evidenced by the S&P 500 falling nearly 20% in spring 2025 and nearly 10% in the first quarter of 2026. Despite strong earnings results—particularly from new economy companies—the performance of S&P 500 technology stocks and the Mag 7 index has only slightly outperformed the broader market since mid-2024. Additionally, for the first time in this bull market, “broader market assets” such as small-cap stocks, value stocks, and international equities have moved more closely in line with new economy stocks over the past year.
Investor sentiment indicators show that investors are neither overly enthusiastic nor extremely pessimistic. The CNN Fear & Greed Index is slightly below average, while the AAII Sentiment Index is slightly above average.
No one wants to miss out on the opportunity for AI to take over the world (FOMO?), but many are also becoming increasingly uneasy about high valuations, concentrated holdings, and wildly aggressive future profit expectations (NBO?). The result? For the first time in history, the performance gap between up days and down days for low-volatility indices has turned negative, reflecting that stock markets now appear to be simultaneously—and perhaps schizophrenically—driven by both FOMO and NBO! This suggests investors may need to proceed with caution in the coming months.
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