Wall Street fear gauge jumps most since 'Liberation Day' as AI trade stumbles

By Saqib Iqbal Ahmed

NEW YORK, Nov 5 (Reuters) - Wall Street’s most closely watched gauge of market anxiety logged its biggest intraday jump in more than 18 months on Thursday as steep losses in chip and data center-related stocks dragged down major stock indexes.

Analysts said much of the selling may reflect an unwind of the previous session's sharp rally and of the crowded AI trade that has driven markets for months, as well as investors cutting risk ahead of expected volatility-driven selling by funds and strategies.

"It really did look as though things were going to relax a little bit and then, you know, the steamroller showed up today," Jim Carroll, senior wealth adviser and portfolio manager at Ballast Rock Private Wealth in Charleston, South Carolina, said.

The Cboe Volatility Index .VIX, an options-based indicator that reflects demand for protection against drops in the stock market, jumped 11.5 points to an eight-month high of 28.09, a day after markets rallied following Democrats' sweeping midterm victory.

The index was last at 27.65, with the Nasdaq Composite .IXIC down 4% as investors fretted that a change of guard in Washington might slow the pace of AI infrastructure development.

At its session high, the VIX, often dubbed Wall Street's "fear gauge," had logged its largest one-day rise since the days immediately after US President Donald Trump unveiled sweeping new import tariffs on "Liberation Day" in April 2025.

REACTION TO VOLATILITY

Thursday's stock market selloff was in sharp contrast to the upbeat market reaction the day before, when investors largely brushed aside the perceived threat to the AI trade from the Democrats' strong showing in the election.

"This is what happens when you have a big rally partly predicated on the idea that volatility would be decreasing ... it made no sense yesterday," said Steve Sosnick, chief strategist at Interactive Brokers.

"Yesterday there was the perception that no one needed protection and now it's 'Oh my god, we need it'," he added.

Analysts attributed some of the market decline to investors looking to get ahead of selling from strategies that react to stock market volatility.

Leveraged and inverse exchange-traded funds, along with some systematic strategies, typically rebalance their exposure near the market close, which can amplify late-day moves in either direction.

"You have people saying ... look at what's going to happen at the end of the day, we need to get out before that," Ballast Rock's Carroll said.

Much now depends on whether investors' attitude toward the AI trade undergoes a lasting change, analysts said.

"If the re-evaluation of the AI investment theme is secular and not just a trading type of rebalance, that's problematic," said Sosnick.