S&P Low Volatility Index Going the "Wrong Way": Is the U.S. Stock Market About to Turn?

Original Author: Jim Paulsen

Original Translation & Compilation: TechFlow

TechFlow Introduction: The S&P 500 Low Volatility Index has recorded an unprecedented anomaly: it rises when the broader market falls and falls when the broader market rises. This never-before-seen price action reveals a schizophrenic state of mind in the current market—investors are simultaneously fearful of missing out on the AI rally (FOMO) and fearful of being caught holding the bag (NBO). Historical data suggests this signal often foreshadows underperformance for both 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 (NBO) in time.

Recently, the performance of the S&P 500 Low Volatility Index has set an unprecedented record. Typically, low volatility stocks rise less when the S&P 500 goes up and fall less when it goes down. However, over the past six months, low volatility investments have, on average, risen on days when the S&P 500 fell and fallen on days when the S&P 500 rose. In other words, a daily decline in the S&P 500 hasn't just allowed defensive low volatility stocks to outperform by "falling less"; it has actually pushed their prices higher. Conversely, on days when the S&P 500 rises, low volatility stocks haven't merely underperformed—their prices have actually declined.

In my view, this recent, extreme, and unprecedented price action of the S&P 500 Low Volatility Index suggests that investors are simultaneously gripped by the fear of missing out (FOMO) and the fear of not bailing out (NBO). Historically, such 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 a variety of defensive securities, including high-quality stocks with stable earnings, secure dividends, and low price beta. It's a typical buy for fearful investors and a quick sell when sentiment turns bullish. The index is specifically designed to rise less in bull markets and fall less in bear markets, catering to conservative investors who want to participate in the market but are afraid of not bailing out on time.

But what does it mean when low volatility investments rise on market down days and fall on market up days? In my opinion, this paints a picture of a market driven not by excessive bullishness or excessive bearishness, but by investors simultaneously worried about FOMO and NBO. Excessive bullishness leads to underperformance by 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 a FOMO/NBO environment, market up days see not only buying of high-risk stocks but also selling of low volatility stocks, while market down days trigger both selling of high-risk stocks and buying of low volatility stocks.

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

Chart 1 shows the average daily percentage price change of the S&P 500 Low Volatility Index over rolling 6-month periods for all S&P 500 up days (blue line) and all S&P 500 down days (red line) since 1990. As illustrated, during almost all rolling six-month periods, the average percentage price change for the S&P 500 Low Volatility Index is positive when the S&P 500 rises and negative when the S&P 500 falls.

Except for the current situation, only briefly around the year 2000 did the rolling six-month price percentage change for the low volatility index turn "positive" during S&P 500 daily up moves, and it has never been "negative" during S&P 500 daily down moves. While the low volatility index almost always underperforms during up markets and outperforms during down markets for the S&P 500, apart 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 the past six months. This means that over the last 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) and, on average, fallen on all S&P 500 up days (blue line)! This might reflect a milestone-grade, or at least very rare, investor mindset or sentiment driving the stock market—my guess is the FOMO/NBO combination.

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

Chart 2 illustrates this unique shift in the S&P 500 Low Volatility Index's performance 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 spread between the red and blue lines in Chart 1. As shown, in the current period, this spread is "uniquely" negative (meaning the low volatility index gains less during S&P 500 up weeks than it gains during S&P 500 down weeks).

Although this performance spread has never been as negative as 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 to the highest quartile (above the red dashed line) near several major stock market bottoms—for example, early 1991, late 2002, March 2009, mid-2020, and late 2022.

FOMO/NBO and Future S&P 500 Performance

What does the performance spread of the S&P Low Volatility Index on S&P 500 up days minus down days imply for the future performance of the overall S&P 500? Chart 3 highlights that since 1990, the average annualized price return of the S&P 500 over the subsequent 1 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 is a robust 17.26%. When the spread is in the middle two quartiles, the average annualized future 1-week return drops to 10.12%. Finally, when the low volatility spread is in the lowest quartile, the average annualized future 1-week price return of the S&P 500 falls to a disappointing 3.92%.

Clearly, the performance difference of the low volatility index during broad market up and down days has historically been very important for the S&P 500's future performance. Essentially, as long as low volatility investments perform significantly better in up markets than in down markets, the S&P 500 tends to deliver solid results. However, when low volatility investments perform better on down market days relative to up market days, the future performance of the S&P 500 typically struggles.

Overall, I believe this indicator serves as a proxy for investor sentiment. The performance of low volatility investments shows how much emphasis investors place on risk aversion. When low volatility investments start performing much better in down markets than in up markets, it suggests investors are placing a higher premium on capital preservation—that their biggest fear is not bailing out on time. And in the unique position we find ourselves in today—where low volatility prices are negative on up days as FOMO drives investors to sell them for more aggressive alternatives, while positive on down days as falling markets genuinely frighten investors about NBO—points to an almost schizoid anxiety driving the stock market.

Finally, Chart 4 shows the performance of the ten S&P 500 sectors when the low volatility performance spread is in the lowest quartile (blue bars) versus when it is in the top three quartiles (red bars) since 1990 (Real Estate is excluded due to its shorter history). Except for Utilities, the lowest quartile results have been particularly favorable for the old economy sectors of the S&P 500, while 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 S&P 500 underperformance but should also consider increasing exposure to old economy sectors and be more cautious about overweighting Technology and Communication Services.

Final Comments

This is the first time in this bull market that the new economy trade has shown a blemish. While Technology/Communication sectors are still leading the market and have received a significant boost from the AI narrative recently, stock market volatility has increased—evidenced by the nearly 20% decline in the S&P 500 in Spring 2025 and the nearly 10% decline in Q1 2026. Despite earnings results, especially for new economy companies, remaining stellar, the performance of S&P 500 tech stocks and the Mag 7 index has only modestly beaten the market since mid-2024. Furthermore, for the first time in this bull market, "broader market assets" like small-cap stocks, value stocks, and international stocks have performed more closely to new economy stocks over the past year.

Investor sentiment indicators show investors are neither overly enthusiastic nor extremely pessimistic. The CNN Fear & Greed Index is slightly below average, while the AAII Sentiment Survey 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 increasingly uneasy about high valuations, concentrated holdings, and wildly aggressive future earnings 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 perhaps schizophrenically driven by both FOMO and NBO! This suggests investors may need to exercise caution in the coming months.