On October 12th, Caixin reported (Editor Xiaoxiang) that if people simply take a quick look at the current US market, what undoubtedly catches the eye is a healthy picture - the S&P 500 index has just set the 45th new high of the year, corporate bonds still show no signs of concern, and commodities continue to rise under the optimistic sentiment of the global economy.

However, after further research, the outlook quickly becomes somewhat dim.

Amid a chorus of cheers externally, volatility is a major issue faced by virtually all asset classes. In August and September, the market situation at one point was unfavorable to traders, catching market participants off guard. This led to a significant increase in the cost of providing hedge protection, with the speed matching the market's own rise.

This frenzy has created an unusual profile across various assets. For example, the volatility index for the US and US Treasury bonds recently saw the largest weekly increase since the beginning of this year. Compared with other periods when the S&P 500 index reached record highs, these two volatility fear indices have now hit levels higher than they have been in over 20 years.

In conclusion, due to next month's US presidential election, uncertainty surrounding the Federal Reserve's policy trajectory, and recent market trauma, the trading sentiment of major stakeholders on Wall Street remains very tense.

Amy Wu Silverman, Head of Derivatives Strategy at Royal Bank of Canada Capital Markets, stated, "The likelihood of low-probability, very bad events is increasing. After the surge of the VIX index in August, the market has indeed returned to normal and hit new highs. However, the potential 'concern' sentiment remains high."

While asset prices have often risen in times of investor anxiety in the past, the current situation is particularly extreme - optimism and skepticism coexist.

The S&P 500 index has risen for five consecutive weeks, with eight out of the past nine weeks showing an uptrend. After exceeding expectations on Friday at JPMorgan and Wells Fargo & Co, the closing price set a new high record for the 45th time this year. The spread on U.S. investment grade bonds has also reached its narrowest level in over three years.

However, at the same time, due to traders' fresh memories of the market crashes in early August and September, investors are showing an unusually cautious sentiment during this bullish period. Since the beginning of this month, both the VIX volatility index for the U.S. stock market and the MOVE index for U.S. bond volatility have significantly increased.

An indicator measuring global cross-asset risk at Bank of America has reached the second-highest level this year, only surpassed by the sharp drop in early August, which resulted in a global stock market capitalization loss of trillions of dollars within a few days. This indicator tracks pressure on global stocks, interest rates, currencies, and commodities, and measures the implied future price volatility of options.

Are you panicking yet still buying?

In other words, although the market remains calm and even flourishing at the moment, the past shocks and uncertain future prospects are still seriously affecting market sentiment.

Traders shaken by the summer market turmoil are struggling to deal with the deadlock of the U.S. election, as well as conflicts in the Middle East. Of course, this also includes the seemingly ongoing expansion of the U.S. economy, with some data still fueling people's doubts, such as this week's higher-than-expected initial jobless claims...

At the same time, there is a growing sense that the Fed led by Powell may not be too eager to immediately inject a large amount of new vitality into the economy. Thursday's September CPI data shows inflation higher than expected, coupled with the surge in U.S. non-farm payroll numbers last week, leading traders to unwind bets on significant rate cuts for the remaining time in 2024. Atlanta Fed President Bostic even indicated his open-mindedness about skipping another rate cut next month.

Peter Tchir, Head of Macro Strategy at Academy Securities, pointed out, 'There is almost a sense of distrust in the market. There have been some significant overnight market fluctuations. Market concerns are abundant, yet stocks are generally rising. We have experienced several rapid declines.'

At the moment, there are signs indicating that after investors' synchronous rebound for five consecutive months, the short positions of bonds and stocks are being rebuilt.

IHS Markit data shows that bearish bets on SPDR S&P 500 ETF Trust (SPY) have reached 2.4% of its outstanding shares, higher than the four-year low of 1.6% at the beginning of this month. Similarly, the short ratio of iShares 20+ Year Treasury Bond ETF reached a new low in 15 months in August, but has now risen to over 1%.

The options market also indicates that there is a strong demand for safe-haven measures during a major stock market decline, with tail risk hedging reaching rare levels seen in the past two years. The MOVE index tracking bond volatility has surged to the highest level since January, and a similar index for crude oil has also soared to unprecedented levels in two years. Since August, the implied volatility of iShares iBoxx Investment Grade Corporate Bond ETF has increased relative to actual price volatility, which is the latest sign of traders paying hedging costs to prevent losses.

Interestingly, against the backdrop of the 10-year U.S. Treasury yield rising more than 40 basis points in the past month, the S&P 500 index has still risen by about 3% - an unprecedented resilience since April 2022.

Threadneedle Investment company's portfolio manager Erika Maschmeyer pointed out, "Despite some macro and micro risks, the market has been very strong. With the countdown to the elections and the upcoming Fed rate decision, we would not be surprised if there is a pullback."

The latest Q3 earnings season will evidently be the next test for the U.S. stock market. According to FactSet data, the market expects a 4.6% year-on-year growth in earnings for the S&P 500 index in the third quarter. Since June 30, profit forecasts for U.S. corporate earnings in the third quarter have been lowered by 3.8 percentage points, with earnings forecasts of eight industries being revised downwards, with the energy industry facing the largest decline.

Trivariate Research founder Adam Parker stated, "This time, the earnings season will be more important than usual. We need specific data from companies."