Goldman Sachs Panic Index Hits Extreme Level, Historically Signaling Medium-Term Rebound

Goldman Sachs Panic Index Hits Extreme Level, Historically Signaling Medium-Term Rebound

TREE NEWS reports: Goldman Sachs traders reported on Saturday that the recent violent selloff in U.S. stocks has pushed market panic to an extreme level. The bank’s volatility panic index surged to 9.57 out of 10 on Thursday, breaking through the 9.5 threshold that marks the “panic zone.” The single-day jump was the third largest on record. Combined with Wednesday’s sharp decline, the two-day cumulative volatility set an all-time record.

Each of the previous 15 times the index breached 9.5, the S&P 500 rose an average of 4.6% over the following three months, with an 80% hit rate. Over six months, the average gain was 9%, with stocks rising in 73% of cases. On Friday, U.S. stocks already rebounded, with the S&P 500 up 0.7% as dip buyers entered amid improved economic data.

Record Two-Day Swing, Panic Quickly Intensifies

Goldman trader Lee Coppersmith said the two-day combined move was the largest on record, “fully illustrating how quickly the market shifted from relief to outright panic.” According to Goldman’s analysis, the sharp reversal stemmed from massive demand for downside protection ahead of Tuesday’s U.S. midterm elections. Investors had sold off hedge positions during the post-election rally, leaving portfolios severely unprotected when stocks turned lower. As prices fell and hedge fund forced liquidations spread, investors scrambled to buy back the protection they had just sold, further exacerbating volatility.

Options Market Panic Signal: Put Volume Hits Record High

The concentrated burst of hedging demand left a clear mark on the options market. On Thursday, Cboe put volume exceeded 11 million contracts, setting a single-day record and surpassing the previous peak in April 2025. Index puts accounted for the bulk of volume, while single-stock put volume also ranked fourth highest in history, highlighting the intense concentration of demand for broad protection. Coppersmith noted, “Yesterday’s move was less about deteriorating fundamentals and more about a very poor technical backdrop and forced re-hedging pressure.”

Historical Pattern Points to Medium-Term Opportunity, but Short-Term Caution Remains

Despite the relatively optimistic medium-term signal from historical data, Goldman traders still urged investors to remain cautious. They noted that more positioning needs to be unwound as the market continues to search for a bottom. “As forced selling gradually subsides, the market’s allocation appeal begins to rise,” Coppersmith wrote. “This doesn’t necessarily mean rushing back into risk assets, but the potential opportunity on the other side is becoming increasingly hard to ignore.” Goldman’s analysis suggests that extreme volatility and forced selling may ultimately create entry opportunities for investors willing to look past short-term turbulence, provided the market completes its current deleveraging process.

Market Implications

The extreme reading in Goldman’s panic index has several implications across asset classes:

• Equities: Historically, such extreme panic levels have been contrarian signals for medium-term gains, but near-term volatility may persist as forced selling continues. The record put volume suggests investors are heavily hedged, which could dampen further downside but also limit immediate upside.
• Bonds: Safe-haven demand could support Treasuries in the near term, but if the panic subsides and equities rebound, yields may rise as risk appetite returns.
• Crypto: Cryptocurrencies, often correlated with risk assets, could see amplified moves. A sustained equity rebound might lift crypto sentiment, while continued deleveraging could pressure digital assets.
• Commodities: Industrial commodities may remain under pressure amid growth concerns, while gold could benefit from lingering uncertainty.
• Currencies: The dollar may stay bid on safe-haven flows, but a shift in risk sentiment could reverse that trend.

Key Takeaways for Investors

• Goldman’s panic index at 9.57 is an extreme reading that has historically preceded strong medium-term returns for the S&P 500.
• However, the market may still need to digest forced selling and deleveraging, so short-term caution is warranted.
• Record put volume indicates widespread hedging, which could set the stage for a relief rally once selling exhausts.
• Investors with longer time horizons might consider gradually adding risk exposure, but should be prepared for continued volatility.