Goldman Sachs' panic indicator has reached a historical extreme range, and historical data shows that this often indicates an opportunity for a medium-term rebound. However, traders warn that the market is still in the process of finding its bottom.
On Saturday, traders at Goldman Sachs Group stated that the intense selling in U.S. stocks had pushed market panic to extreme levels. The bank's Volatility Panic Index soared to 9.57 on Thursday (out of a full score of 10), breaking through the critical threshold of 9.5, marking the third largest one-day increase on record. Combined with the significant decline on Wednesday, the total volatility over the two days set a new historical high.
Goldman Sachs historical data shows that whenever the index has broken through the 9.5 threshold 15 times prior to this, the S&P 500 index has averaged a gain of 4.6% in the following three months, with a hit rate of 80%; over a six-month period, the average increase was 9%, and in 73% of cases, the stock market recorded gains. On Friday, U.S. stocks showed a rebound, with the S&P 500 index rising by 0.7%. Buying on dips occurred against the backdrop of positive economic data.
Two-day fluctuations set a historical record, with panic levels rising rapidly.
Goldman Sachs trader Lee Coppersmith stated that the total fluctuation over these two days is the largest on record, "fully demonstrating the rapid shift in the market from a sense of relief to complete panic."
According to analysts from Goldman Sachs, this sharp reversal stems from the massive demand for downside protection in the market ahead of the U.S. mid-term elections on Tuesday. Investors had previously sold their hedging positions during the post-election rebound, leaving their portfolios severely unprotected as the stock market began to decline. As stock prices tumbled and hedge funds were forced to liquidate their positions, investors scrambled to repurchase the protective positions they had just sold, further exacerbating market volatility.
Option market panic signal: Put option trading volume hits a record high
The concentrated outbreak of hedging demand has left a clear mark on the options market. On Thursday, the trading volume of Cboe put options exceeded 11 million contracts, setting a new daily record and surpassing the previous peak in April 2025. Among them, index put options contributed the majority of the trading volume, and the trading volume of individual stock put options also ranked fourth highest in history, highlighting the highly concentrated demand for broad protection in the market.
Coppersmith pointed out that 'yesterday's trend reflects more of a very poor technical situation and the pressure to be forced to re-hedge than a deterioration in fundamentals.'
Historical patterns indicate opportunities in the medium term, but caution is still needed in the short term.
Despite historical data showing relatively optimistic medium-term signals, Goldman Sachs traders still advise investors to remain cautious. They point out that as the market continues to find its bottom, there is still more position volume that needs to be absorbed.
"As the forced selling gradually subsides, the market's attractiveness as an investment option begins to rise," writes Coppersmith, "This doesn't necessarily mean one should rush back to risk assets, but the potential opportunities on the other side are becoming increasingly difficult to ignore."
Goldman Sachs' analysis indicates that extreme volatility and forced selling may ultimately create entry opportunities for investors willing to endure short-term turmoil, but this is contingent on the market completing its current deleveraging process.
