Author: Jim Paulsen

Translation: Shenchao TechFlow

Chao Guide: The S&P 500 Low Volatility Index has exhibited an unprecedented anomaly: it rises when the market falls and falls when the market rises. This unprecedented price behavior reveals the current market's schizophrenic state—investors are both afraid of missing out on the AI frenzy (FOMO) and scared of being caught at high valuations (NBO). Historical data shows that this signal often indicates poor upcoming performance for the stock market and technology stocks.

The recent unique price movement of the S&P 500 Low Volatility Index indicates that investors are simultaneously caught in two anxieties: fearing missing out on opportunities (FOMO) and fearing not exiting in time (NBO).

Recently, the performance of the S&P 500 Low Volatility stock price index has set unprecedented records. Typically, low volatility stocks rise less when the S&P 500 rises and fall less when the S&P 500 declines. However, over the past six months, low volatility investments have averaged gains on days when the S&P 500 fell, and conversely, fell on days when the S&P 500 rose. This means that the daily decline of the S&P 500 not only allowed defensive low volatility stocks to outperform by "falling less," but even directly pushed up the prices of low volatility stocks; conversely, on days when the S&P 500 rose, low volatility stocks not only performed poorly, but their prices actually fell.

In my view, the recent unprecedented extreme price behavior of the S&P 500 Low Volatility Index indicates that investors are simultaneously caught in the dual anxieties of missing out on opportunities (FOMO) and not exiting in time (NBO). Historically, the price behavior of low volatility stocks often serves as a warning signal for the stock market and technology 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 stocks in the S&P 500 with the least volatility. The index is composed of various defensive securities, including high-quality, stable earnings, secure dividends, and low beta value stocks. It is a typical target for fear-driven buyers and also objects to rapid selling during bullish periods. This index is specifically designed to rise less in a bull market and fall less in a bear market, aimed at conservative investors who wish to participate in the market but fear not exiting in time.

But what does it mean when low volatility investments rise in a falling market and fall in a rising market? In my view, it depicts a market driven neither by excessive optimism nor excessive pessimism, but by investors who are simultaneously worried about FOMO and NBO. Excessive optimism can lead to poor performance of low volatility stocks, while excessive pessimism can make low volatility stocks winners. However, when the dual fears of FOMO and NBO are both prominent, low volatility stocks behave unusually by "rising" on down days and "falling" on up days. In a scenario where both FOMO and NBO coexist, days when the market rises not only attract buying of high-risk stocks but are also accompanied by sell-offs of low volatility stocks; meanwhile, on days when the market falls, both high-risk stock sell-offs and low volatility stock buying are stimulated.

Performance of the S&P Low Volatility Index on Up Days 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 during rolling 6-month periods for all up days (blue line) and down days (red line) of the S&P 500 since 1990. As illustrated, in 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; when the S&P 500 index is down, it is negative.

Aside from the current situation, there was only a brief period in 2000 when the rolling six-month price percentage change of the low volatility index was "positive" during S&P 500 up days, whereas it has never been "negative" during S&P 500 down days. Despite the low volatility index almost always performing poorly during S&P 500 rallies and excellently during S&P 500 downturns, it has never previously shown the unique behavior of being up on all S&P 500 down days and down on all S&P 500 up days in the last six months—meaning 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 gains on all S&P 500 down days (red line) while simultaneously averaging losses on all S&P 500 up days (blue line) over the past six months! This could reflect a milestone or at least very rare investor mindset or sentiment driving the stock market—my guess is the FOMO/NBO combination.

Average Historical Performance of the Low Volatility Index Subtracting Down Days from Up Days

Chart 2 illustrates this unique shift in the performance of the S&P 500 Low Volatility Index from a somewhat different perspective. It shows the average performance difference of the low volatility index over the past 26 weeks when comparing all S&P 500 up weeks to all S&P 500 down weeks. This is the difference between the red line and the blue line in Chart 1. As depicted, during the contemporary period, this difference is "uniquely" negative (i.e., the gains of the low volatility index during overall S&P 500 rallies are less than the gains during S&P 500 declines).

While this performance difference has never been as negative as it is today, it frequently dips into historic low quartiles (i.e., below the green dashed line) near several important stock market peaks—such as mid-2000, 2007, 2018, early 2020, and end of 2021. It also often surges into the highest quartile (above the red dashed line) near several important stock market bottoms—such as early 1991, late 2002, March 2009, mid-2020, and end of 2022.

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

What does the performance difference of the S&P Low Volatility Index on up days versus down days mean for the future overall performance of the S&P 500? Chart 3 highlights that, since 1990, the average annualized price gain of the S&P 500 over the next week is highly sensitive to the quartile differences of the low volatility index. When the low volatility difference is in the highest quartile (i.e., above the red dashed line in Chart 2), the S&P 500's average annualized price increase for the following week reaches a robust 17.26%. When the low volatility difference is in the middle two quartiles, this average annualized gain for the following week falls to 10.12%; finally, when the low volatility difference is in the lowest quartile, the S&P 500's average annualized price gain for the following week drops to a disappointing 3.92%.

Clearly, the performance difference of the low volatility index during overall stock market rallies and declines has historically been quite significant for the future performance of the S&P 500 index. Essentially, as long as low volatility investments perform much better in rising markets than in falling ones, the S&P 500 typically delivers robust results. However, when low volatility investments perform better on down days relative to up days, the future performance of the S&P 500 usually struggles.

Overall, I believe this indicator represents a proxy for investor sentiment. The performance of low volatility investments shows the importance investors place on risk aversion. When low volatility investments begin to perform far better in declining markets than in rising markets, it indicates that investors prioritize capital preservation—namely, their greatest fear is not exiting in time. In our current unique position—on up days, low volatility performance is negative because FOMO leads investors to sell low volatility stocks in favor of more aggressive alternatives, while on down days, low volatility performance is positive because the declining market genuinely instills fear of NBO—this suggests a nearly schizophrenic anxious mindset is driving the stock market.

Lastly, Chart 4 shows, since 1990 (with the real estate sector excluded due to its shorter history), the performance of the top ten sectors of the S&P 500 when the low volatility performance difference is in the lowest quartile (blue bars) versus when it is in the highest three quartiles (red bars). Except for the utilities sector, the results in the lowest quartile particularly favor the S&P 500's old economy sectors, while the new economy sectors (i.e., technology and communication services) typically perform much better when the low volatility performance difference is in the upper three quartiles. Therefore, if the low volatility difference remains in the bottom quartile, historically, investors should not only expect poor performance from the S&P 500 but also consider increasing exposure to old economy sectors and be more cautious in their overweighting of technology and communication services.

Final Comments

This is the first sign of flaws in new economy trades during this bull market. Although the technology/communication sectors continue to lead the stock market and have recently received a substantial boost from the AI narrative, market volatility has increased—evidenced by the S&P 500 index dropping nearly 20% in the spring of 2025 and about 10% in the first quarter of 2026. Despite excellent earnings results—especially for new economy companies—the performance of S&P 500 technology stocks and the MAG 7 index has been only slightly better than the market since mid-2024. Additionally, for the first time in this bull market, the performance of "broader market targets" such as small-cap stocks, value stocks, and international stocks has been more closely aligned with new economy stocks over the past year.

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

No one wants to miss the chance of AI taking over the world (FOMO?), but many are increasingly uneasy about high valuations, concentrated holdings, and crazy aggressive future earnings expectations (NBO?). So, what’s the result? The low volatility index's performance gap between up days and down days is negatively reflecting for the first time in history, indicating that the stock market seems to be increasingly and perhaps schizophrenically driven by both FOMO and NBO! This suggests investors may need to proceed with caution in the coming months.