Anxiety is gradually taking hold of the stock market. Anticipate an increase in selling activity this week.

Wall Street Faces Mounting Uncertainty Amid Geopolitical Tensions

Wall Street is bracing for turbulence as protective options trading surges and systematic funds prepare to reduce their stock holdings in the coming week.

Signs of trouble are emerging for U.S. equities. Over the last two weeks, stocks have edged downward, pressured by escalating tensions with Iran. This conflict has fueled concerns about rising inflation and interest rates, especially as oil prices climb. Many investors are preparing for a potentially sharp downturn in the days ahead.

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Rocky Fishman, founder of Asym 500, notes a significant divergence between the Cboe Volatility Index (VIX) and the S&P 500’s realized volatility over the past 10 days. Last week, the VIX was 10 points higher than expected, highlighting heightened anxiety in the options market. The VIX, often called Wall Street’s “fear gauge,” reflects demand for protection against market swings.

Fishman explains, “One-month realized volatility for the S&P 500 is just 12%, and the index remains within 5% of its record high—both signs that would typically suggest calm markets.” However, he points out that recent price movements don’t fully capture the level of apprehension seen in options trading.

The VIX is heavily influenced by activity in S&P 500 options. When the VIX rises, it often signals that more investors are seeking insurance against sharp declines.

Although only two of the last ten trading days saw the S&P 500 close down by at least 1%, these figures can obscure significant intraday volatility. The VIX ended Friday above 27, which is about one standard deviation above its historical average.

“Despite some of the most dramatic intraday swings, stocks have ended up in a holding pattern,” says Hank Smith, head of investment strategy at Haverford Trust. “We’re not causing any damage.”

Beneath the surface, however, the market appears fragile. On Friday, just 31% of S&P 500 stocks closed above their 50-day moving average, nearing the lowest level since last November, according to Dow Jones Market Data.

Technical Indicators Signal Caution

The 50-day moving average (DMA) is a widely followed measure of market momentum. Generally, the more stocks trading above this threshold, the more optimistic the outlook. As of Friday, major indexes like the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite were hovering just above or slightly below their 200-day moving averages—a key trendline. A drop below this level is often seen as a warning of further declines.

This shift leaves the market with narrow leadership, as gains are increasingly concentrated in the information technology sector and a few major tech names like Nvidia and Alphabet. Although Alphabet is technically part of the communication services sector, it is often grouped with other tech giants.

During periods of uncertainty, investors frequently turn to large-cap tech stocks. The aftermath of the Silicon Valley Bank collapse in March 2023 is a recent example. Last week, strong earnings from Oracle and Broadcom also lifted the tech sector, according to Brian Mulberry, chief market strategist at Zacks Investment Management.

Mulberry adds, “There’s still a lot of uncertainty about how the Iran conflict will play out and what it could mean for inflation.”

Market Leadership Shifts as Volatility Rises

After lagging earlier in the year, technology shares have reclaimed the lead, with the Nasdaq outperforming both the S&P 500 and the Dow over the past two weeks. Meanwhile, the small-cap Russell 2000 has erased its year-to-date gains as the Iran crisis rattled markets, according to FactSet.

Smith from Haverford Trust observes that traders remain reluctant to sell aggressively, fearing they might miss out on a sudden rebound. This behavior is linked to former President Donald Trump’s tendency to reverse course under market pressure—a phenomenon some call the “TACO” trade (“Trump Always Chickens Out”).

“No one wants to be caught off guard if the president suddenly declares victory and the conflict ends, causing stocks to surge,” Smith told MarketWatch.

He adds, “That’s likely why the S&P 500 hasn’t seen a steeper drop this month—there’s a lot of money on the sidelines worried about missing a rally.”

Looking ahead, selling could accelerate as trend-following funds are expected to reduce $36 billion in U.S. stock exposure, according to Goldman Sachs. If the market falls sharply, these funds may be forced to sell even more aggressively.

It’s worth noting that stocks were already showing signs of weakness before the Iran conflict erupted. The S&P 500, Dow, and Nasdaq all posted their third consecutive weekly loss on Friday—the longest losing streak for the S&P 500 in a year.

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