Are Markets Ignoring the Risks Again? What Price Action and Volatility are Telling Us

Markets are behaving surprisingly calmly right now, even though tensions from geopolitical disputes are still intact, and Trump’s on-again-off-again approach to tariffs are very much still in the spotlight. The VIX index, often referred to as the “fear index” because of its correlation with the S&P 500, recently fell back below 20. This has historically been viewed as a signal of calm markets. At the same time, US stocks are rising again after the volatility spike earlier this spring, and investors seem to believe that there is a “soft landing” for the global economy on the horizon. 

This raises a critical concern: Are markets once again underestimating risk? Behind the surface, some signs in price action tell us that something else might be happening. Even though the VIX indicates stability, technical analysis and price action hint at potential market overheating, especially in sectors like technology. 

Price action strategy focuses on how price moves, rather than why it moves. Right now, the S&P 500’s recent rally with shrinking trading volume signals that momentum may not be as strong as headlines suggest. In the Nasdaq, for instance, much of the recent upside has been driven by a handful of mega-cap stocks (e.g. Nvidia and AI-related tech companies), while the broader market lags behind. In this case, the divergence often precedes either a reversal or increased volatility.

Eurozone Inflation

In May, Eurozone inflation dipped below the ECB’s 2% target for the first time in years, strengthening the case for policy easing. Markets now expect the ECB to move forward with more rate cuts, after the first one in early June. However, the drop in inflation may not be evenly distributed—Germany and France, for example, have recently seen stronger-than-expected price pressures. If underlying inflation proves sticky, the ECB could find itself caught between supporting growth and keeping inflation anchored.

Regardless, EU stocks have continued to rise - especially in rate-sensitive sectors. This growing disconnect between inflation data and market optimism could prove unsustainable.

Mixed signs from commodities

Another sign of underlying shifts is evident when looking at commodities like gold and oil, both recently hitting their respective multi-week highs. Gold—often viewed as a safe haven—has climbed to multi-week highs, suggesting that some investors are quietly positioning for risk. At the same time, oil prices have also risen, thanks to a weaker US dollar, the escalating conflict in the middle east, and a growing optimism about the U.S.-China trade talks.

Together, these moves reflect a market that’s far less settled beneath the surface than headline equity performance or the VIX might suggest.

Calm before the Storm?

Looking back at history, these periods of apparent calm often preceded sharp market sell-offs, for example, in the early stages of the COVID-19 pandemic. The muted response of VIX futures to the continuously rising risks highlighted a broader pattern of complacency in the VIX futures market. 

Similarly, the pre-global financial crisis era in 2008 saw sustained low volatility for months before equities and credit markets collapsed. These historical parallels suggest that today’s low VIX may signal a false sense of security rather than genuine market stability.

While every period of low volatility not necessarily means that markets are about to crash - it should be seen as a warning sign, particularly in combination with stagnant inflation and rising commodity prices. In such an environment, the optimism can quickly become very brittle. The price of ignoring these quieter signals may not be visible today, but markets have a long history of revealing the cost—eventually.