What Does the Abnormal Trend of the S&P Low Volatility Index Reveal About the Market's Fear of Missing Out and Fear of Being Left Behind?

Original Title: FOMO with NBO?
Original Author: Jim Paulsen, Financial Analyst
Original Compilation: Shenchao TechFlow

Introduction: 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 exposes the current market's schizophrenic state—investors are both afraid of missing out on the AI frenzy (FOMO) and afraid of being left behind at high positions (NBO). Historical data shows that such signals often predict poor performance for the stock market and tech stocks in the near future.

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

Recently, the performance of the S&P 500 Low Volatility 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 falls. However, over the past six months, low-volatility investments have averaged gains on days when the S&P 500 has fallen and losses on days when the S&P 500 has risen. In other words, the daily declines of the S&P 500 have not only allowed defensive low-volatility stocks to outperform by “falling less,” but have even directly pushed up the prices of low-volatility stocks; conversely, on days when the S&P 500 rises, low-volatility stocks not only perform poorly but actually see price declines.

In my view, the recent unprecedented extreme price movements of the S&P 500 Low Volatility Index indicate that investors are simultaneously caught in a dual anxiety of missing opportunities (FOMO) and not exiting in time (NBO). Historically, this price behavior of low-volatility stocks has often served as a warning signal 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 within the S&P 500 Index. This index consists of various defensive securities, including high-quality, profit-stable, dividend-safe stocks with low price beta values. It is a typical buy target for fearful investors and is quickly sold off during bullish periods. This index is designed to have smaller gains in bull markets and smaller losses in bear markets, catering to conservative investors who want to participate in the market while fearing not exiting in time.

But what does it mean when low-volatility investments rise during market declines and fall during market gains? In my opinion, this depicts a market driven not by excessive bullishness or bearishness, but by investors simultaneously worried about FOMO and NBO. Excessive bullishness can lead to poor performance of low-volatility stocks, while excessive bearishness allows low-volatility stocks to become winners. However, when the dual fears of FOMO and NBO are both prominent, low-volatility stocks behave anomalously by “rising” on down days and “falling” on up days. In a scenario where both FOMO and NBO coexist, up days in the market not only attract buying of high-risk stocks but also see selling of low-volatility stocks; conversely, down days in the market stimulate both selling of high-risk stocks and buying of low-volatility stocks.

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 changes of the S&P 500 Low Volatility Index over rolling six-month periods since 1990, on all up days (blue line) and down days (red line) of the S&P 500. As shown, in almost all rolling six-month periods, when the S&P 500 rises, the average percentage price change of the S&P 500 Low Volatility Index is positive; when the S&P 500 falls, it is negative.

Aside from the current situation, the only time a rolling six-month low-volatility index price percentage change was “positive” during S&P 500 up days occurred briefly in 2000, while it has never been “negative” during S&P 500 down days. Although the low-volatility index has almost always performed poorly during S&P 500 market upswings and excellently during downswings, it has never, except in contemporary times, risen on all S&P 500 down days and fallen on all S&P 500 up days in the past six months. This means that the performance of the S&P 500 Low Volatility Index over 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 averaging losses on all S&P 500 up days (blue line)! This may reflect a milestone or at least a very rare investor mindset or sentiment driving the stock market—my guess is the FOMO/NBO combination.

Average Historical Performance of 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 compared to all S&P 500 up weeks versus all S&P 500 down weeks. This is the difference between the red line and blue line in Chart 1. As shown, in contemporary times, this difference is “uniquely” negative (i.e., the low-volatility index's gains during overall S&P 500 upswings are less than its gains during downswings).

While this performance difference has never been as negative as it is today, it has often fallen into the historical lowest quartile (i.e., below the green dashed line) near several significant market peaks—such as mid-2000, 2007, 2018, early 2020, and late 2021. It has also frequently surged into the highest quartile (above the red dashed line) near several significant market bottoms—such as early 1991, late 2002, March 2009, mid-2020, and late 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 minus down days mean for the future overall performance of the S&P 500? Chart 3 highlights that since 1990, the average annualized price increase 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 price difference is in the highest quartile (i.e., above the red dashed line in Chart 2), the average annualized price increase of the S&P 500 over the next week reaches a strong 17.26%. When the low-volatility price difference is in the middle two quartiles, its average annualized future one-week increase drops to 10.12%. Finally, when the low-volatility price difference is in the lowest quartile, the average annualized price increase of the S&P 500 over the next week drops to a disappointing 3.92%.

Clearly, the performance differences of the low-volatility index during overall market upswings and downswings have historically been very important for the future performance of the S&P 500 index. Essentially, as long as low-volatility investments perform significantly better in rising markets than in falling markets, the S&P 500 typically delivers solid results. However, when low-volatility investments perform better on down days compared 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 showcases the degree to which investors prioritize risk aversion. When low-volatility investments begin to perform significantly better in down markets than in up markets, it indicates that investors are increasingly focused on capital preservation—that is, their greatest fear is not exiting in time. In our current unique position—where low-volatility price performance is negative on up days due to FOMO leading investors to sell low-volatility stocks in favor of more aggressive alternatives, while on down days, low-volatility price performance is positive because the down market genuinely instills fear of NBO—this indicates a nearly schizophrenic anxious mindset is driving the stock market.

Finally, Chart 4 shows the performance of the top ten sectors of the S&P 500 since 1990 (the real estate sector is excluded due to its shorter history) when the low-volatility performance spread is in the lowest quartile (blue bars) versus when it is in the highest three quartiles (red bars). With the exception of the utilities sector, the results in the lowest quartile particularly favor the old economy sectors of the S&P 500, while the new economy sectors (i.e., technology and communication services) tend to perform much better when the low-volatility performance spread is in the highest three quartiles. Therefore, if the low-volatility spread 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 while being more cautious about over-allocating to technology and communication services.

Final Comments

This is the first instance of flaws appearing in new economy trades during this bull market. While the technology/communication sectors continue to lead the stock market and have recently received a significant boost from the AI narrative, market volatility has increased—evidenced by the nearly 20% drop in the S&P 500 index in spring 2025 and nearly 10% drop in the first quarter of 2026. Despite excellent earnings results—especially from new economy companies—the performance of S&P 500 tech stocks and the Mag 7 index has only slightly outperformed the market since mid-2024. Additionally, for the first time in this bull market, broader market targets such as small-cap stocks, value stocks, and international stocks have performed more closely to 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 opportunity of AI taking over the world (FOMO?), but many are increasingly uneasy about high valuations, concentrated holdings, and wildly aggressive future earnings expectations (NBO?). What’s the result? The performance spread of the low-volatility index between up days and down days is negative for the first time in history, reflecting that the stock market seems to be increasingly and possibly schizophrenically driven by both FOMO and NBO! This suggests that investors may need to proceed with caution in the coming months.

Original Link