Goldman's volatility gauge crosses into panic territory. Will stocks bounce back?

The sweeping selloff in U.S. stocks has pushed market panic to an extreme, Goldman Sachs traders wrote in a note cited by Bloomberg on Friday. Historically, such episodes have signaled a strong rebound over the medium term.

The bank’s Vol Panic Index surged to 9.57 out of 10 points on Thursday, crossing the 9.5 threshold that marks the panic zone. The roughly five-point increase was the third-largest one-day jump on record. It followed the index’s fourth-largest-ever decline on Wednesday.

“The combined two-day swing was the largest on record, which I think shows how quickly the market went from relief to outright panic,” said Lee Coppersmith, cohead of equity derivatives sales in Goldman Sachs’ New York office.

Following the 15 previous instances when the Vol Panic Index exceeded 9.5 points, the S&P 500 gained an average of 4.6% over the next three months, rising in 80% of cases, Goldman noted. Over six months, the average gain was 9%, with positive returns in 73% of cases.

The sharp market reversal on Wednesday followed a surge in demand for protection against market declines ahead of Tuesday’s U.S. midterm elections, Bloomberg wrote. Clients sold hedges into Wednesday’s rally, leaving their portfolios underprotected when stocks plunged on Thursday. As stocks tumbled and forced liquidations spread across hedge funds, investors scrambled to buy back the protection they had just shed, according to the traders.

Demand for hedges showed up in options trading: more than 11 million put contracts traded on Cboe on Thursday. That was a daily record, surpassing the previous peak in April 2025, Bloomberg reported. Index puts accounted for most of the activity. Single-stock options volume was the fourth highest on record, indicating that demand was concentrated in broad-market protection, Bloomberg noted.

“Yesterday was as much about an exceptionally poor technical setup and forced re-hedging as it was about a deterioration in fundamentals,” Coppersmith wrote.

Although investors still have positions to unwind and the market continues to search for a bottom, historical patterns suggest that extreme volatility and forced selling should eventually create opportunities for investors willing to take a long-term view, Goldman Sachs traders argue.

“The setup starts to look more interesting as forced selling runs its course,” Coppersmith said. “Not necessarily a reason to rush back into risk, but it’s getting harder to ignore the potential opportunity on the other side.”