Fear is slowly taking hold of the stock market. Expect sales to begin this week.
Storm clouds are gathering over Wall Street.
US stocks have fallen slightly over the past two weeks, as the conflict with Iran heightened concerns about inflation and interest rates as oil prices rose. And investors are looking at what could be a painful downward leg this week.
One indication of this: The gap between the Cboe Volatility Index VIX and the S&P 500’s SPX has seen volatility in the previous 10 days be 10 points wider than it should have been in the previous one, according to Rocky Fishman, founder of Asym 500, a firm that specializes in options market data and analytics. The Cboe Volatility Index is better known as the VIX, or Wall Street’s “fear gauge.”
See: Options traders are pricing in ‘crisis’ as the Iran conflict escalates. Here’s how investors can benefit.
“The one-month S&P 500 saw volatility stand at just 12%, and the index is within 5% of its all-time highs — both metrics that alone would suggest markets are calm,” Fishman said in a written note. That means recent swings in the S&P 500 don’t fully reflect the level of fear expressed in the options market.
The VIX level is driven by trading in options contracts on the S&P 500. A higher VIX can mean that more investors are seeking protection from market damage.
See: Investors avoided US debt as a playground during the Iran conflict
Moreover, only two of the past 10 sessions have seen the S&P 500 finish lower by 1% or more – although in some cases, these closing levels can offset intraday swings seen during the session. And yet the VIX ended Friday above 27, a level nearly a standard deviation above the index’s long-term average.
“Despite some very rare intraday percentage drops, they’ve returned stocks to a stable or neutral position,” said Hank Smith, managing director and chief investment strategist at Haverford Trust. “We are not doing anything wrong.”
However, the stock market looks very fragile under the hood. On Friday, only 31% of S&P 500 components finished above their 50-day moving average, near the lowest level since Nov. 20, according to Dow Jones Market Data.
The 50-DMA is one of the most widely used technical indicators in market dynamics. A common refrain from investors is that the more shares of a benchmark index hold above that level, the better market conditions are for investors.
As of late Friday, the major US stock indexes, including the S&P 500, the Dow Jones Industrial Average DJIA and the Nasdaq Composite COMP, were trading slightly above or below their 200-day moving averages, another key trend line. Technical strategists consider a break below the 200-DMA as a sign of more pain to come.
Stock trading that helped boost prices for consumer staples XX:SP500.30 and industrial stocks XX:SP500.20 earlier this year has also pulled back, suggesting that rallies in long-overdue sectors and small-caps may be faltering, as the chart above shows.
That will leave the markets back in a very negative state of leadership, with gains concentrated again within the information technology sector XX:SP500.45 and a handful of Big Tech stocks, such as Nvidia NVDA and Alphabet GOOGL GOOG. Alphabet is officially a member of the telecommunications services industry XX:SP500.50, but like many other megacap companies it is often classified as Big Tech.
Investors tend to seek out shares of megacap tech companies during turbulent times; the fallout of Silicon Valley Bank in March 2023 was one such example. But strong gains from Oracle ORCL and Broadcom AVGO also helped boost the tech sector last week, said Brian Mulberry, chief market strategist at Zacks Investment Management, during an interview with MarketWatch.
“But what you see is still a lot of uncertainty when it comes to the outcome and the duration [Iran] war, and what it will mean for inflationary pressures,” said Mulberry.
After lagging the broader market in the first two months of 2026, technology stocks regained a leading role, with the Nasdaq outperforming the S&P 500 and the Dow over the past two weeks. The Russell 2000 RUT junior has been hammered, erasing its year-to-date gains since the Iran conflict sent markets into a tailspin, according to FactSet data.
Haverford Trust’s Smith said traders still seem hesitant to sell more because many fear missing out on the market too soon. That fits with President Donald Trump’s history of backing down under pressure from the financial markets — a practice some call “TACO” trading, using the acronym “Trump Always Chickens Out.”
“Traders don’t want to get caught in a situation where, all of a sudden, the president declares victory and the bombing stops, and the market just goes wild,” Smith told MarketWatch.
“That’s probably one of the reasons why the S&P 500 didn’t go on a big decline this month — there’s a lot of trading money out there that’s very worried about missing a spike in the markets,” Smith added.
A sell-off may begin next week as trend-following funds prepare to reduce their exposure to $36 billion in U.S. stocks, according to a Friday report from Goldman Sachs. If the market falls too much, those funds may be forced to open their positions more aggressively.
To be sure, stocks looked shaky even before the Iran conflict erupted. The S&P 500, Dow and Nasdaq each posted their third straight weekly loss on Friday. For the S&P 500, that’s the longest streak of weekly losses of the year.
