This week, Wall Street experienced a dramatic resurgence in volatility, as evidenced by a significant spike in the Cboe Volatility Index (VIX), often referred to as the market’s “fear gauge.” The VIX surged sharply on Friday, adding to gains from the previous day, and raised important questions about the potential continuation and severity of the summer selloff in stocks.
The VIX, which measures the market’s expectations of future volatility based on S&P 500 index options, closed at 23.57 on Friday, a notable rise from earlier in the day when it nearly hit 30. This level of volatility had not been seen since the immediate aftermath of the collapse of Silicon Valley Bank in March 2023. The VIX’s end-of-day reading represents a 27% increase for the day alone, and a staggering 43.7% rise for the week. This weekly gain is the largest since the week ending January 21, 2022, according to data from FactSet. The surge in volatility also marked the end of a 190-day streak of VIX closes below 20, a level considered its long-term average. This streak was the longest period of subdued volatility since February 2018, when an event known as “Volmageddon” caused the VIX to double in a single day, signaling a sharp shift in market sentiment.
The extended period of low VIX readings had led some market observers to question its effectiveness as a measure of market fear. There were concerns that the increasing reliance on shorter-dated options, expiring within 24 hours, might have diminished the gauge’s relevance. However, the recent sharp rise in the VIX has challenged this view, with analysts like Matt and Mike Thompson of Little Harbor Advisors noting that the current market conditions—marked by larger, slower-moving economic issues—have caused the VIX to react more strongly. According to Matt Thompson, the rise in the VIX suggests that traders are beginning to anticipate prolonged market turbulence and are thus opting for longer-term hedges to protect their portfolios.
The increase in the VIX also had an impact on the CNN Fear and Greed Index, which briefly entered the “extreme fear” territory on Friday. This index aggregates several market indicators, including the VIX and the number of stocks hitting new 52-week highs on the New York Stock Exchange, to gauge overall investor sentiment.
Friday’s volatility also underscored a broader trend in the market. Earlier in the year, the VIX had reached its lowest level since November 2019, raising concerns that low volatility readings could be a precursor to a market correction. The sharp increase in the VIX on Friday has validated these concerns, demonstrating that periods of market calm can be deceptive and that significant shifts in market sentiment can occur suddenly.
The broader market also showed signs of stress, with the S&P 500 Index falling 1.8% to 5,346.56, indicating a decline from its recent highs. Traders noted that markets often experience increased volatility during the period between August and October, historically known for heightened market fluctuations.
The Nasdaq Composite Index fell by 2.4% to 16,776.16, marking its first correction—a decline of at least 10% but not more than 20% from a recent high—since October. Similarly, the Dow Jones Industrial Average dropped 1.5% to 39,737.26, experiencing its worst two-day decline since September 2022.
As the market continues to navigate this period of heightened volatility, opinions on the future trajectory of stocks are divided. Some experts, including Nicholas Colas of DataTrek, believe that a VIX reading of 30 might be needed to signal a complete market capitulation. Others, like Katie Stockton of Fairlead Strategies, suggest that the recent spike in the VIX could indicate that the market’s near-term lows have already been reached. The coming days will be crucial in determining whether the recent volatility represents a short-term shakeout or signals a more significant shift in market conditions.