After the sharp decline in July, funds are re-entering the market, and the "fear index" of US stocks has fallen sharply, but Wall Street is beginning to be cautious.

The U.S. stock market has staged a strong rebound from the severe deleveraging in July, with investors scrambling to chase rising prices, causing volatility indicators to plummet to near calm levels. However, Wall Street traders and strategists are issuing warnings: beneath the surface calm, the market structure harbors vulnerabilities, and any external catalyst could trigger a rapid and self-reinforcing directional shock. The VIX index has dropped sharply from a high of about 21 points in July to around 15 points a level historically synonymous with absolute market tranquility. Meanwhile, Goldman Sachs' internal panic indicator plummeted from 7.9 at the end of July to below 1, reaching its lowest point since June 2024. Bloomberg market strategist Jan-Patrick Barnert noted that the residual positioning structure left by last month's massive deleveraging makes the market extremely vulnerable to mechanical capital flows causing directional upheaval ahead of important risk events, such as upcoming inflation data, Nvidias earnings report, and the Jackson Hole central bank annual symposium. Three Wall Street trading desks provided nearly unanimous descriptions of the current August market: investors are selectively chasing gains, but not out of firm conviction. While fundamentals may support current index levels, market sentiment remains far from broadly optimistic. The traces of chasing gains: "Biblical-level" distortions in the options market Following the brutal deleveraging in July, buy-side institutions generally held lighter positions, coinciding with one of the strongest earnings seasons in recent years. Concurrently, market rotation began, with stocks outside the AI sector and quality AI stocks becoming the core of risk-bearing. Nomura Securities cross-asset strategist Charlie McElligott stated, "Clients were caught off guard," and began chasing gains. This behavior of chasing gains is not reflected in price movements but is clearly imprinted in the options market: call options were heavily bought, while put options rapidly lost value as indices soared beyond everyone's hedging strike prices. McElligott described the resulting skew distortion as "biblical-level." The one-month 25-Delta call option skews for the S&P 500 and Nasdaq 100 have both fallen to historically flat levels, with S&P 500 call option volumes hitting record highs. Over the past week, realized volatility on up days has significantly outpaced that on down dayssuggesting that the only concern in the market seems to be missing out on further gains. Individual stock volatility has been obliterated, with risks underlying the calm not yet resolved Individual stock-level volatility has been largely smoothed over in this process. Goldman Sachs derivatives and flows expert Lee Coppersmith noted that the average one-month implied volatility for Nasdaq 100 constituents dropped by 9.1 percentage points within three trading days, while the decline for S&P 500 constituents reached 6 percentage points. Coppersmith stated, "In the AI era, we've seen larger-scale volatility impacts, only during the volatility shock of August 2024 and the tariff event in April 2025." At that time, the VIX had exceeded 60 points. In contrast, over the past month, the VIXs peak was only around 21 points, after which it quickly receded. However, trouble may lie here. While Goldmans internal panic indicator has indeed sunk to a low, a non-farm payroll report revealing a decrease of 23,000 jobs, U.S. Treasury yields hovering around 4.7%, the latest twists in yen intervention, and the unresolved conflict in Iran together present a macro risk profile that cannot be overlooked. Although earnings data looks strong, the macroeconomic backdrop has not fully substantiated an overall positive outlook. AI is no longer an overall position but rather a stock-picking checklist At the index level, the overall exposure appears to have shifted fully toward risk appetite. Yet beneath the surface, skepticism remains. AI trading remains the markets core, but the thematic leading basket is diversifying. Not all stocks that were battered in July have experienced a vigorous reboundstorage chip stocks are a typical example. Nick Savone, Global Head of Institutional Equity Consulting at Morgan Stanley, remarked, "This may be a week where familiar trades regain life but do not simply revert to old patterns as a wider macro insight. Diversity remains extremely high, and after Julys deleveraging, investors are reinvesting fundsalbeit with more discretion." Morgan Stanley's data shows that the dispersion among S&P 500 constituents is at the 92nd percentile over the past five years, while the dispersion between and within sectors is only at the 35th percentile. This indicates that stock-picking capability is overshadowing thematic allocation as the dominant market logic. AI is no longer a transaction that needs to be holistically held; it has become a list of selected stocks that need to be meticulously chosen. Positioning structure as a double-edged sword; the next catalyst could trigger a chain reaction The current chasing rally has transformed the positioning structure into a double-edged sword. Aggregated market maker gamma is currently slightly skewed to the bearish side, while there exists a batch of market makers holding short call options above the 7,900-point strike price, which could accelerate the "melt-up" rally if the market continues to rise. The issue lies on the other side. Previously "burned" put options are now priced far below the spot price, and the reversal point for trend-following short signals conveniently corresponds to a drop of about 4%highly overlapping with the range where those market makers are concentrated in short puts. From a macro narrative perspective, todays inflation data is not viewed as the core risk for August; the markets attention is more focused on the Nvidia earnings report and the Jackson Hole symposium at the end of the month. These two events align closely with the seasonal pattern of heightened volatility observed in previous autumns. Bloomberg strategist Barnert concludes that the gradual rebuilding of positions following Julys massive de-risking, combined with a sustained demand for downside hedges, has together created conditions for the market to react rapidly and violently when the next catalyst appears. Given that investors may neither have sufficient downside protection nor enough upside exposure, the probability of the market remaining highly dynamic is quite high. This article is reproduced from "Wall Street Watch," author: Xu Chao; GMTEight editor: Chen Siyu.