The S&P Low Volatility Index Is 'Walking in Reverse' — Is the U.S. Stock Market About to Change?

Original Author: Jim Paulsen

Original Compilation: Deep Tide TechFlow

Deep Tide Intro: The S&P 500 Low Volatility Index has recorded an anomaly for the first time ever: it rises when the broader market falls, and falls when the broader market rises. This unprecedented price action reveals the schizophrenic state of the current market—investors are simultaneously gripped by the Fear Of Missing Out (FOMO) on the AI rally and the fear of being left holding the bag (NBO). Historical data suggests this signal often foreshadows underwhelming performance for the stock market and tech stocks in the near term.

The recent unique price action of the S&P 500 Low Volatility Index indicates that investors are caught in a dual anxiety: both the fear of missing out (FOMO) and the fear of not bailing out in time (NBO).

Recently, the performance of the S&P 500 Low Volatility Index has set an unprecedented record. Typically, low volatility stocks gain less when the S&P 500 rises and decline less when the S&P 500 falls. However, over the past six months, low volatility investments have, on average, risen on days the S&P 500 fell, and fallen on days the S&P 500 rose. In other words, daily declines in the S&P 500 not only allowed defensive low volatility stocks to outperform by "falling less," but actually pushed their prices higher; conversely, on days when the S&P 500 rose, low volatility stocks didn't just underperform—they experienced actual price declines.

In my view, this recent unprecedented and extreme price action of the S&P 500 Low Volatility Index suggests that investors are simultaneously plagued by the dual anxieties of FOMO and NBO (Not Bailed Out). Historically, this kind of price behavior in low volatility stocks often serves as a warning signal for the broader stock 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 in the S&P 500. The index comprises various defensive securities, including high-quality, profitable, dividend-safe stocks with low price beta. It is the quintessential buy for the fearful and a quick sell during bullish times. The index is specifically designed to gain less during bull markets and decline less during bear markets, catering to conservative investors who want to participate in the market but are wary of being caught off guard.

But what does it mean when low volatility investments rise on market down days and fall on market up days? To me, this paints a picture of a market driven not by excessive bullishness or bearishness, but by investors simultaneously worried about both FOMO and NBO. Excessive bullishness leads to underperformance of low volatility stocks, while excessive bearishness makes them winners. However, when the dual fears of FOMO and NBO are both prominent, low volatility stocks paradoxically "rise" on down days and "fall" on up days. In an environment of coexisting FOMO and NBO, market up days trigger not only buying of high-risk stocks but also selling of low volatility stocks; market down days simultaneously stimulate selling of high-risk stocks and buying of low volatility stocks.

Performance of the S&P Low Volatility Index on Up Days and Down Days of the S&P 500

Chart 1 below shows the average daily percentage price change for the S&P 500 Low Volatility Index over rolling six-month periods, on all S&P 500 up days (blue line) and all S&P 500 down days (red line) since 1990. As illustrated, in nearly all rolling six-month periods, the average percentage price change of the S&P 500 Low Volatility Index has been positive when the S&P 500 rises and negative when the S&P 500 falls.

Except for the current situation, the rolling six-month price percentage change for the low volatility index has only briefly been "positive" on S&P 500 up days around 2000, and has never been "negative" on S&P 500 down days. Although the low volatility index almost always underperforms during S&P 500 up markets and outperforms during down markets, aside from the current era, it has never risen on all S&P 500 down days and fallen on all S&P 500 up days over a six-month period. 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)! This likely reflects a milestone or at least very rare investor mindset or sentiment driving the stock market—my guess points to a FOMO/NBO combination.

Historical Average Performance of the Low Volatility Index on Up Days Minus Down Days

Chart 2 illustrates this unique shift in the performance of the S&P 500 Low Volatility Index from a slightly different angle. It shows the average performance difference of the low volatility index over the past 26 weeks, comparing all S&P 500 up weeks versus all S&P 500 down weeks. This is essentially the difference between the red and blue lines in Chart 1. As shown, in the current era, this difference is "uniquely" negative (i.e., the low volatility index gains less during overall S&P 500 rises than it does during S&P 500 declines).

While this performance differential has never been negative like it is today, it has often fallen into the lowest historical quartile (i.e., below the green dashed line) near several major stock market peaks—for example, mid-2000, 2007, 2018, early 2020, and late 2021. It has also frequently surged into the highest quartile (above the red dashed line) near several major market bottoms—such as early 1991, late 2002, March 2009, mid-2020, and late 2022.

FOMO/NBO and the Future Performance of the S&P 500

What does the performance differential of the S&P Low Volatility Index on S&P 500 up days minus down days imply for the future overall performance of the S&P 500? Chart 3 highlights that, since 1990, the average annualized price return of the S&P 500 over the next week has been highly sensitive to the quartile of this low volatility spread differential. When the low volatility spread is in the highest quartile (i.e., above the red dashed line in Chart 2), the future average annualized price return of the S&P 500 has been a robust 17.26%. When the spread is in the middle two quartiles, the average annualized one-week forward return drops to 10.12%. Finally, when the spread is in the lowest quartile, the average annualized one-week forward price return of the S&P 500 falls to a disappointing 3.92%.

Clearly, the performance differential of the low volatility index during overall stock market up and down days has historically been significant for the future performance of the S&P 500. Essentially, as long as low volatility investments perform much better in up markets compared to down markets, the S&P 500 has typically delivered solid returns. However, when low volatility investments perform better on down market days relative to up market days, the future performance of the S&P 500 has generally struggled.

Overall, I believe this indicator serves as a proxy for investor sentiment. The performance of low volatility investments demonstrates the degree of investor risk aversion. When low volatility investments start performing significantly better in down markets than in up markets, it indicates that investors are placing a higher priority on capital preservation—meaning their greatest fear is not bailing out in time. And in our current unique position—where low volatility prices are negative on up days because FOMO drives investors to sell them for riskier alternatives, and positive on down days because falling markets genuinely scare investors about NBO—this points to a nearly schizophrenic anxiety-driven state of mind steering the stock market.

Finally, Chart 4 shows the performance of the ten major S&P 500 sectors when the low volatility performance spread is in the lowest quartile (blue bars) versus the top three quartiles (red bars) since 1990 (real estate is excluded due to its shorter history). Except for the Utilities sector, the results in the lowest quartile particularly favor the old economy sectors of the S&P 500, while the new economy sectors (i.e., Technology and Communication Services) have typically performed much better when the low volatility spread is in the upper 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 should also consider increasing exposure to old economy sectors and remaining cautious about overweighting Technology and Communication Services.

Final Thoughts

This is the first crack in the new economy trade during this bull market. While the Technology/Communication sectors continue to lead the stock market and have received a significant boost recently from the AI narrative, 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. Although earnings results, especially for new economy companies, remain stellar, the performance of S&P 500 tech stocks and the Mag 7 index has only slightly outperformed the market since mid-2024. Furthermore, for the first time in this bull market, over the past year, "broader market participants" like small-cap stocks, value stocks, and international stocks have been performing more closely to new economy stocks.

Investor sentiment indicators show that investors are neither overly enthusiastic nor extremely pessimistic. The CNN Fear & Greed Index is slightly below average, and the AAII Sentiment Survey is slightly above average.

No one wants to miss out on the AI taking over the world (FOMO?), but many are also increasingly uneasy about high valuations, concentrated holdings, and wildly aggressive future profit expectations (NBO?). The result? The performance spread of the low volatility index between up days and down days has turned negative for the first time ever, reflecting a stock market that seems increasingly, and possibly schizophrenically, driven by both FOMO and NBO! This suggests investors may need to proceed with caution in the coming months.