Introduction: The S&P 500 Low Volatility Index has experienced an unprecedented anomaly: when the market drops, it rises, and when the market rises, it falls. This unprecedented price behavior has exposed the current market's schizophrenic state—investors are both experiencing the fear of missing out on AI euphoria (FOMO) and the fear of being caught at high levels (NBO). Historical data shows that this signal often predicts poor performance in the stock market and tech stocks.
The recent unique price action of the S&P 500 Low Volatility Index indicates that investors are simultaneously caught in two anxieties: the fear of missing out (FOMO) and the fear of not exiting in time (NBO).
Recently, the performance of the S&P 500 Low Volatility Price Index has reached a record level. Normally, low volatility stocks have a smaller increase when the S&P 500 rises and a smaller decrease when the S&P 500 falls. However, in the past six months, low volatility investments have averaged gains on days when the S&P 500 declines, and have experienced losses on days when the S&P 500 rises. This means that the S&P 500's daily declines not only allowed defensive low volatility stocks to outperform by "falling less" but also directly boosted the prices of low volatility stocks; conversely, on days when the S&P 500 rises, low volatility stocks not only underperform but actually experience price declines.
In my view, the recent extreme price action of the S&P 500 Low Volatility Index indicates that investors are simultaneously caught in a dual anxiety of the fear of missing out (FOMO) and the fear of not exiting in time (NBO). Historically, this type of low volatility stock price action has often been a warning sign for the stock market and tech stocks.
What is the S&P 500 Low Volatility Index?
The S&P 500 Low Volatility Index aims to measure the performance of the 100 least volatile stocks in the S&P 500 Index. The index is composed of various defensive securities, including high-quality, stable profitability, dividend safety, and low price beta stocks. It is a typical buy target for the fearful and a quick sell target in bullish times. This index is specifically designed to have smaller gains in bull markets and smaller losses in bear markets, aiming to satisfy conservative investors who want to participate in the market but fear not exiting in time.
But what does it mean when low volatility investments rise when the market falls and fall when the market rises? In my view, this depicts a market that is neither driven by excessive bullishness nor excessive bearishness but rather by investors who are simultaneously worried about FOMO and NBO. Excessive bullishness causes low volatility stocks to underperform, while excessive bearishness makes low volatility stocks winners. However, when the dual fears of FOMO and NBO are highlighted simultaneously, low volatility stocks anomalously "rise" on down days and "fall" on up days. In a scenario with both FOMO and NBO, market up days not only see buying in high-risk stocks but also witness selling in low volatility stocks; market down days stimulate selling in high-risk stocks and buying in low volatility stocks simultaneously.
Performance of the S&P Low Volatility Index on S&P 500 Up Days and Down Days
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 all S&P 500 up days (blue line) and down days (red line). As shown in the chart, during almost all rolling six-month periods, when the S&P 500 Index is up, the average percentage price change of the S&P 500 Low Volatility Index is positive; and when the S&P 500 Index is down, it is negative.
Except for the current situation, the scenario where the rolling six-month low volatility index price percentage change was "positive" during S&P 500 up days briefly occurred only in the year 2000, while it has never appeared as "negative" during S&P 500 down days. Despite the low volatility index almost always underperforming during S&P 500 market upswings and excelling during S&P 500 market downturns, except for the contemporary period, it has never shown all S&P 500 down days up and all S&P 500 up days down in the past six months. In other words, the performance of the S&P 500 Low Volatility Index in the past six months is "unique" compared to any other period since 1990—it has averaged an increase on all S&P 500 down days over the past 6 months (red line), while averaging a decrease on all S&P 500 up days over the past 6 months (blue line)! This may reflect a milestone or at least a very rare investor sentiment or emotion driving the stock market—my guess is a combination of FOMO/NBO.
Historical Performance Gap of the Low Volatility Index on Up Days Minus Down Days
Chart 2 illustrates this unique change in the performance of the S&P 500 Low Volatility Index from a slightly different perspective. It shows the average performance difference of the low volatility index 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, in the contemporary period, this difference is "uniquely" negative (meaning the low volatility index's increase during overall S&P 500 up days is less than during S&P 500 down days).
While this performance gap has never been negative like today, it frequently plunged to historical lows near several important stock market peaks—such as mid-2000, 2007, 2018, early 2020, and late 2021. It also regularly soared to the highest quartile near several significant stock market bottoms—such as early 1991, late 2002, March 2009, mid-2020, and late 2022.
FOMO/NBO and S&P 500 Future Performance
The performance delta of the S&P Low Volatility Index on S&P 500 up days minus down days and its implication for future overall S&P 500 performance—what does it mean? As highlighted in Chart 3, since 1990, the S&P 500's future 1-week average annualized price change is highly sensitive to the low volatility index price delta differential. When the low volatility delta is in the highest quartile (i.e., above the red dashed line in Chart 2), the S&P 500's future 1-week average annualized price change reaches a robust 17.26%. When the low volatility delta is in the middle two quartiles, the average annualized future 1-week gain drops to 10.12%. Lastly, when the low volatility delta is in the lowest quartile, the S&P 500's future 1-week average annualized price increase falls to a disappointing 3.92%.
Evidently, the performance delta of the low volatility index during overall stock market advances and declines has always been crucial for the S&P 500's future performance. Essentially, as long as low volatility investments outperform significantly during up days compared to down days, the S&P 500 usually delivers a robust performance. However, when low volatility investments fare better on down days relative to up days, the S&P 500's future performance typically struggles.
Overall, I believe this metric represents a proxy for investor sentiment. The performance of low volatility investments showcases investors' emphasis on risk aversion. When low volatility investments start to outperform significantly on down days compared to up days, it indicates that investors are more concerned about capital preservation—meaning their biggest fear is missing the exit. And in the unique position we find ourselves in today—where low volatility performance is negative on up days due to FOMO driving investors to sell low volatility stocks in favor of more aggressive alternatives, while low volatility performance is positive on down days because the falling market truly scares investors about NBO—this implies an almost schizophrenic anxious mindset is driving the stock market.
Lastly, Chart 4 illustrates the performance of the top 10 S&P 500 sectors since 1990 (real estate sector excluded due to its shorter history) when the low volatility performance delta is in the lowest quartile (blue bars) versus in the highest three quartiles (red bars). Apart from the Utilities sector, the results in the lowest quartile are particularly favorable for the S&P 500's Old Economy sectors, while the New Economy sectors (i.e., Technology and Communication Services) tend to perform much better when the low volatility performance delta is in the top three quartiles. Therefore, if the low volatility delta remains in the bottom quartile, based on historical experience, investors should not only expect a poor S&P 500 performance but also consider increasing exposure to Old Economy sectors and be more cautious about overweighting in Technology and Communication Services.
Final Thoughts
This is the first glitch in the new economy transaction during this bull market. While the tech/communication sector continues to lead the stock market and has recently received a huge boost from the AI narrative, stock market volatility has increased — with the S&P 500 dropping nearly 20% in the spring of 2025 and nearly 10% in the first quarter of 2026 as evidence. Despite strong earnings results, especially from new economy companies, the S&P 500 tech stocks and Mag 7 index have only slightly outperformed the market since the mid-2024. Additionally, for the first time in this bull market, over the past year, broader market targets such as small caps, value stocks, and international equities have performed more in line with 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 Index is slightly above average.
No one wants to miss out on the opportunity of AI taking over the world (FOMO?), but many are also growing increasingly uneasy about high valuations, concentrated holdings, and the crazy aggressive future profit expectations (NBO?). The result? The performance spread of low volatility indexes between up days and down days is negative for the first time in history, reflecting that the stock market seems to be driven more and more concurrently and potentially schizophrenically by FOMO and NBO! This suggests that investors may need to proceed with caution in the coming months.
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