Source: Jinshi Data After experiencing one of the calmest summers in years, Wall Street's "Fear Index" has surged again as investors worry that the trade deadlock may escalate further. The Cboe Volatility Index (VIX), more commonly referred to as the VIX or Wall Street's "Fear Index," briefly traded at 22.76 on Tuesday, according to Dow Jones market data, marking its highest intraday level since May 23 when the index peaked at 25.53. By the end of the trading session, the VIX significantly retreated from its morning high, closing above 20, a level that holds particular significance. Since the VIX was established in the early 1990s, its long-term average has been just under 20. As a result, investors tend to view this threshold as the boundary between relative market calmness and rising fears. The VIX level is based on trading activity of options contracts linked to the S&P 500 index with an expiration of about one month. It is regarded as an indicator of traders' anxiety regarding a potential market “drop.” After all, when markets decline, volatility usually rises more sharply. In hindsight, signs suggest that investors have begun to feel a bit overly complacent. Throughout the summer, the stock market has incrementally risen with little interruption. According to FactSet data and calculations from MarketWatch, this peaceful trading eventually caused the S&P 500 index's three-month realized volatility to drop to its lowest level since January 2020 last week. Realized volatility is a measure of the degree of fluctuation of a specific index or asset over a recent period, while the implied volatility measured by the VIX seeks to evaluate how much market fluctuations investors expect in the near term. The VIX and the S&P 500 index's realized volatility saw a brief synchronization in decline, but divergence began to appear around Labor Day. According to portfolio managers interviewed by MarketWatch, this could indicate several different scenarios. The first is that investors are increasingly inclined to use call options instead of actual stocks to bet on further increases in the stock market. If the S&P 500 index rises above a specified level before a certain time (known as the expiration date), call options will yield a return. This could also imply that some traders are heavily purchasing put options as a form of portfolio insurance. Due to concerns over various potential risks that could disrupt the remarkable rebound since the beginning of the year, some investors may prefer to hedge their downside risk while holding onto their stocks, not wanting to miss out on any further gains. Signs indicating that the market may be preparing for upcoming turbulence began appearing as early as late September. According to analysis from Ryan Detrick of the Carson Group, from September 29 to October 3, the S&P 500 index and the VIX index rose simultaneously for five consecutive trading days. This has not occurred since 1996. Portfolio manager Michael Kramer of Mott Capital Management stated that seeing both the VIX and the S&P 500 index rise together suggests that the market's calm phase may soon come to an end. Mike Thompson, co-portfolio manager at Little Harbor Advisors, remarked, “The tinder for market volatility has already been piled up.” Kramer from Mott Capital added, “You just need that one spark to ignite it.” Although trade tensions remain unresolved, the Thompson brothers, Mike and Matt, who are also co-portfolio managers at Little Harbor Advisors, are closely monitoring for any potential signs that may indicate a larger wave of volatility. Investors generally attribute stock market sell-offs to escalations in trade tensions. In the view of the Thompson brothers, Trump's tariff "dance" has started to feel a bit too familiar to not pose a genuine concern. Investors appear to have grasped this pattern: one side pushes for maximum leverage, first escalating and then de-escalating. In their view, a more reasonable threat to market stability would be turmoil in the credit markets. On Tuesday, JPMorgan's CEO Jamie Dimon warned of potential further credit issues after the bank incurred losses from loans to the now-bankrupt subprime auto lender Tricolor. Troubles in this area may worsen after a prolonged period of relatively favorable credit market conditions. Last Friday, BlackRock and other institutional investors requested to withdraw funds from Point Bonita Capital, a fund managed by investment bank Jefferies, after the bankruptcy of auto parts supplier First Brands Group caused significant losses for the fund. Matt Thompson stated, “We are watching to see if another shoe will drop.”

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