Goldman's Fear Index has skyrocketed to an extreme level. Is this a signal that stock prices will rise?

A massive sell-off of U.S. stocks has pushed market panic to extreme levels, according to Goldman Sachs traders, as cited by Bloomberg. In the past, such situations have signaled a strong recovery in stock prices over the medium term.

The Vol Panic Index, developed by the bank, jumped to 9.57 points out of a possible 10 on November 5, surpassing the 9.5-point threshold that marks the panic zone. The increase of approximately 5 points marked the third-largest single-day jump in the index’s history. It followed a sharp decline in the index on Wednesday, November 4, which was the fourth-largest in its history.

“The cumulative two-day fluctuation was the largest on record, and I think this shows just how quickly the market shifted from relief to outright panic,” said Lee Koppersmith, co-head of equity derivatives sales at Goldman Sachs’ New York office.

In the 15 previous instances when the Vol Panic Index exceeded 9.5, the S&P 500 Index gained an average of 4.6% over the following three months, with gains recorded in 80% of those cases, Goldman notes. Over a six-month period, the average gain was 9%, with a 73% probability of a positive outcome.

The sharp market reversal on November 4 was preceded by a surge in demand for hedging against a market decline ahead of Tuesday’s U.S. midterm elections, according to Bloomberg. During the rally on Wednesday, November 4, the bank’s clients sold hedging instruments, leaving their portfolios inadequately protected when stocks plummeted on November 5. According to traders, amid the price collapse and the spread of forced liquidations of hedge fund positions, investors rushed to buy back the protective instruments they had just sold off.

Demand for hedging was reflected in options trading volumes: On Thursday, more than 11 million put option contracts were traded on the Cboe. This is a record daily volume, surpassing the previous high set in April 2025, according to Bloomberg. The majority of the trades were in index put options. Trading volume in single-stock options reached the fourth-highest level on record—indicating that demand was concentrated specifically on broad-market protection, the agency notes.

“Yesterday’s sell-off was driven in equal measure by an extremely unfavorable technical situation in the market and a forced re-establishment of defensive positions, rather than solely by deteriorating fundamentals,” Koppersmith wrote.

Although investors still need to close out some of their positions and the market continues to search for a bottom, historical trends show that extreme volatility and forced selling may ultimately create opportunities for investors willing to take a long-term view, according to Goldman Sachs traders.

“As the wave of forced selling comes to an end, the market is starting to look more and more interesting,” said Koppersmith. “This isn’t necessarily a reason to rush back into risky assets, but it’s becoming increasingly difficult to ignore the potential opportunities that will emerge once the sell-off is over.”

This article was AI-translated and verified by a human editor