Storm clouds are gathering over Wall Street.

U.S. stocks drifted lower in a slow grind over the past two weeks, as the conflict with Iran stoked worries about inflation and interest ​rates as oil prices shot higher. And investors are bracing for what could be a painful leg lower this week.

15 stocks in the S&P 500 showing double-digit gains since the attack on Iran began

The financial sector is sending some spooky technical signals about the stock market

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Investors are shunning U.S. debt as a haven play during the Iran conflict

One indication of this: The gap between the level of the Cboe Volatility Index VIX and the S&P 500’s SPX realized volatility over the prior 10 days was 10 points wider than it should have been last week, according to Rocky Fishman, founder of Asym 500, a firm that focuses on data and analytics for the options market. The Cboe Volatility Index is better known as the VIX, or Wall Street’s “fear gauge.”

See: Options traders are pricing in ‘disaster’ as Iran conflict intensifies. Here’s how investors might profit.

“One-month S&P 500 realized volatility is at just 12%, and the index is within 5% of its all-time high — both metrics that on a stand-alone basis would say markets are calm,” Fishman said in written commentary. That means recent swings in the S&P 500 don’t fully reflect the level of fear being expressed in the options market.

The level of the VIX is driven by trading in S&P 500 options contracts. A higher VIX can mean more investors are seeking out protection against a market crash.

See: Investors are shunning U.S. debt as a haven play during the Iran conflict

On the surface, only two of the past 10 sessions saw the S&P 500 finish down 1% or more — although in some cases, these closing levels can mask the intraday swings seen during the session. And yet the VIX finished Friday above 27, a level that is roughly one standard deviation above the index’s long-term average.

“Despite some of the most extraordinary intraday moves up and down percentage-wise, they just put stocks back in this position of stasis or neutrality,” said Hank Smith, director and head of investment strategy at Haverford Trust. “We’re doing no harm.”

However, the stock market looks more fragile underneath the hood. On Friday, just 31% of the S&P 500’s components finished above their 50-day moving average, near the lowest level since Nov. 20, according to Dow Jones Market Data.

The 50-DMA is one of the most widely used technical indicators on market strength. A common refrain among investors is that the more stocks in a benchmark index hold above that level, the more bullish the market conditions are for investors.

As of Friday’s close, major U.S. equity indexes, including the S&P 500, Dow Jones Industrial Average DJIA and Nasdaq Composite COMP, were trading slightly above or a bit below their 200-day moving averages, another important trend line. Technical strategists view a break below the 200-DMA as a signal of more pain ahead.

The rotation trade that had helped push up values of consumer-staples XX:SP500.30 and industrial XX:SP500.20 stocks earlier this year also has slammed into reverse, suggesting that rallies in previously lagging sectors and in small-cap equities might be running out of steam, as the chart above reflects.

That would leave markets back in the less-than-ideal position of narrow leadership, with gains once again concentrated within the information-technology sector XX:SP500.45 and a handful of Big Tech stocks, such as Nvidia NVDA and Alphabet GOOGL GOOG. Alphabet is officially a member of the communication-services sector XX:SP500.50, but like many other megacap companies it is often lumped in with Big Tech.

Investors often seek out shares of megacap tech companies during times of turmoil; the aftermath of the collapse of Silicon Valley Bank in March 2023 was one such example. But strong earnings from Oracle ORCL and Broadcom AVGO also helped boost the technology sector last week, said Brian Mulberry, chief market strategist at Zacks Investment Management, during an interview with MarketWatch.

“But what you’re seeing is still a lot of uncertainty when it comes to the outcome and the duration of the [Iran] war, and what it is going to mean for inflationary pressures,” Mulberry said.

After lagging the broader market in the first two months of 2026, technology stocks have regained the leadership role, with the Nasdaq outperforming the S&P 500 and the Dow over the past two weeks. The small-cap Russell 2000 RUT has gotten hammered, erasing its year-to-date gains since the Iran conflict sent markets into a tailspin, according to FactSet data.

Haverford Trust’s Smith said traders still appear hesitant to sell heavily because many fear missing a sudden market recovery. That ties with President Donald Trump’s history of backtracking under pressure from financial markets — a tendency that some call the “TACO” trade, using an acronym that stands for “Trump Always Chickens Out.”

“Traders don’t want to get caught in a situation where, all of a sudden, the the president declares victory and the bombing ends, and then the market just shoots way higher,” Smith told MarketWatch.

“That’s probably one reason why the the S&P 500 hasn’t sustained a more significant decline this month — there’s trading money out there that is really concerned about missing out on a spike in the markets,” Smith added.

The pace of the selling could pick up this coming week as systematic trend-following funds are poised to cut $36 billion worth of exposure to U.S. stocks, according to a Friday report from Goldman Sachs. If the market moves sharply lower, those funds could be forced to unwind their positions even more aggressively.

To be sure, stocks were looking wobbly even before the Iran conflict broke out. The S&P 500, Dow and Nasdaq each tallied a third straight weekly loss on Friday. For the S&P 500, that is the longest streak of weekly losses in a year.

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