The jobs market had started showing signs of a struggle earlier this year.

Job numbers steadily declined while unemployment rose. July’s 4.3% unemployment rate was its highest level since October 2021.

So the Federal Reserve’s larger-than-expected 0.5% cut last month proved it was paying close attention to the situation.

That’s also why last week’s data release was such good news.

The September payrolls report showed that employers created 254,000 jobs during the month. That easily surpassed the 150,000 new jobs that economists expected.

Likewise, the unemployment rate fell to 4.1% in the latest print.

The improved figures should’ve provided the sigh of relief investors were searching for.

But instead, a sign of fear among investors is trending higher…

Measuring Investor Fear

Fear and greed constantly tug at investor emotions.

And despite the good news on the jobs front, fear is creeping into the stock market.

You can see that with the CBOE Volatility Index (VIX).

Many refer to the VIX as Wall Street’s fear gauge. It measures implied volatility on the S&P 500.

The VIX usually jumps higher when the S&P 500 pulls back. That’s because daily price movements pick up when the stock market is selling off.

In fact, some of the worst market declines in history have seen sharp spikes higher in the VIX. Take a look at the long-term chart below.

During the sell-off following the pandemic in 2020, the VIX jumped to over 80.

And it saw its highest level ever during the financial crisis in 2008.

But volatility like this has a distinguishing feature…

It tends to cluster. One volatile trading session marked by downside is typically followed by more over the near term.

These clusters are similar to a heart rate monitor when a patient is in crisis. Stress levels go into overdrive and repeatedly send the VIX higher.

And despite the stock market’s calm surface recently, the VIX bears watching right now.

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The VIX Is Quietly Moving Higher

Since its inception in 1990, the VIX’s average value is near 19.

When the VIX starts pushing above that level, we should be on the lookout for another volatility cluster.

Look at what happened back in early August (the arrow in the chart below). The horizontal line shows the long-term VIX average at 19.

As the VIX started jumping above the long-term average, stocks plunged around the world. The S&P 500 fell over 8% from the July peak.

And the VIX’s action seems to be the start of another volatility cluster.

Take a look at what’s happening with VIX today (the circle on the chart).

The VIX has risen steadily. It reached the 22 level in early September and is back in that range again this month.

Despite these spikes higher, the stock market has stayed relatively tranquil. But that may not last…

If VIX continues pushing higher than the 22 level, that’s a warning sign. And traders should be wary of bumps to come in the stock market.

I shared recently about October historically being the most volatile month.

And with elections around the corner, I see multiple reasons for caution in the weeks ahead.

So despite the momentary calm in stocks, keep an eye on what’s developing with volatility trends…

Regards,

Larry Benedict
Editor, Trading With Larry Benedict