By Patti Domm

Investors have been more fearful of missing out on stock market gains than hedging against negative news this year. That could help limit any pullback before year-end.

As stocks sold off Tuesday, there was a rumbling below the surface and talk of a larger correction. But the market is also entering one of the best periods of the year. Seasonality and FOMO could continue to counter some of the negative headwinds.

There have been some strong contrarian warnings, and some strategists have been waiting for a shakeout that will remove some of the froth from the market.

"The market has been able to move up in this very steady manner because there were check backs along the way," said Ari Wald, technical analyst at Oppenheimer. "We are kind of at this point where another check back would be reasonable and that would help reset conditions."

In their latest poll, Investors Intelligence reported the fewest bears, 13.5%, since 2018.

"If everybody is bullish and has already bought, who is left to buy?" Wald said.

The market hasn't experienced enough exuberance to signal a major correction is near, despite the run-up in high-beta tech, Wald said. But he is watching the behavior of the S&P 500 Low Volatility Index. Stocks in that index are typically steady and defensive.

One such ETF is down 3% in the past month.

Low-volatility stocks are "breaking down," Wald said. "They are contributing to internal market weakness."

"The fact that defensives are underperforming, is that a good thing or a bad thing?" he asked, rhetorically. The answer isn't clear yet.

Other market signals suggest trouble ahead, said Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI.

"The backup in other risk assets, such as crypto, open up the potential for something more than the modest pullback that remains our base case," said Emanuel. Bitcoin is down more than 15% in the past month.

Emanuel said he expects stock market volatility to increase and sees a number of risks to the market that could play out before year end.

One is the pending case before the Supreme Court on whether President Donald Trump overstepped his authority under the International Emergency Economic Powers Act when he issued some tariffs on trading partners. If the administration loses the case, it is expected to have to return the funds the government has collected, although Congress or the administration could impose new tariffs to compensate for that loss. The case will be heard Wednesday, but a ruling may not come for months.

Because the tariffs provide revenue to the government, Emanuel said Treasury yields could rise "vigorously" if the White House loses the case. That could be a negative for stocks.

Market volatility in general has been relatively low this year. The S&P 500 has gained about 16% so far.

The Chicago Board of Options Exchange Volatility Index, or VIX, is widely watched as a measure of fear or market panic in times of volatility. It jumped more than 12% Tuesday to about 19.25 as stocks sold off. Its long-term average is 19.5.

But the worry reflected by the VIX in recent selloffs was the fear of missing out on stock market gains.

The VIX spiked above 60 during April's Liberation Day selloff. It also climbed above 25 on Oct. 10, when the S&P 500 lost 2.7% after Trump announced new tariffs on China. The VIX is calculated based on activity in the puts and calls on the S&P 500.

"The options market has consistently, I would say, signaled high confidence in the so-called Trump put in that during selloffs we tend to see very little demand for additional downside protection," said Mandy Xu, head of derivatives market intelligence at Cboe. Many investors believe Trump moderates his policies when stocks fall.

In the October selloff, some of the volatility in the VIX wasn't due to fear of downside but rather the fear of missing out on the market's recovery, Xu said.

"It was very much the same dynamic that we saw in April, where markets sold off, but there was very little panic in the options market," she said. "Where we saw the biggest increases in implied volatility was actually from the call side. People were playing for a rebound."

The move in the VIX on Tuesday was the result of the selloff in the S&P 500, and there was very little additional demand for either upside or downside optionality.

"In other words, there was very little fear in the options market," said Xu.

November should wind up positive despite the volatility, said Tom Lee, founder and head of research at Fundstrat. He bases that on the performance of the market this year.

He also notes that going back to 1935, there were six periods similar to now, in which the market rose for six consecutive months ending in October. In the following Novembers, stocks had an average gain of 2.5%.

Write to editors@barrons.com.

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November 05, 2025 13:16 ET (18:16 GMT)

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