The S&P 500 tallies fourth straight session in the red as Wall Street turns cautious

Investors are turning cautious as a stock-market rally stalls out.

Investors are taking a more cautious tack as rising bond yields and a calendar riddled with risks - from Federal Reserve meetings to the U.S. midterm elections - inspire many to adopt a more cautious position.

As major indexes like the S&P 500 SPX stall out, hedge funds appear to be turning more cautious. The S&P 500 on Thursday tallied a fourth straight session in the red, its longest losing streak since June, according to Dow Jones Market Data. The Cboe Volatility Index VIX, better known as the "VIX" or as Wall Street's "fear gauge," rose to its highest level since early August, data showed.

Recent numbers from Goldman Sachs's prime brokerage unit showed equity-focused hedge funds have dialed back their net exposure to stocks to some of the lowest levels of the past year.

John Flood, a managing director at Goldman, said in a client note obtained by MarketWatch that investors were demonstrating a surprising lack of willingness to "play meaningful offense." Practically everybody he had spoken with was bringing up the same handful of concerns - from the risks of stubborn inflation pushing the Fed to act to growing uneasiness about the upcoming midterm elections and the ongoing situation in Iran.

Meanwhile, rising bond yields were helping to turn up the temperature on a market that is starting to look overextended based on historical trends, according to an analysis from Ned Davis Research.

The yield on the 10-year Treasury note BX:TMUBMUSD10Y surged on Thursday to a fresh three-year high as rising oil prices and President Donald Trump's promise of an outcome-dependent election dividend weighed on bonds. Bond yields move inversely with prices.

In commentary recently shared with MarketWatch, Nomura's Charlie McElligott blamed Wall Street's current "low-enthusiasm, low-positioning dynamic" on what he called a "negative risk trinity."

The market is facing a 'negative risk trinity' in the form of Fed interest-rate-hike prospects, rising bond yields and control of Congress on the line in the midterm elections. Charlie McElligott, Nomura

Rising crude-oil prices and strong corporate profits are stoking worries that the Federal Reserve might start raising interest rates again after a three-year break, McElligott said. CME Group data put market-implied expectations of a rate hike later this month at about 70% on Thursday. Concerns about the outcome of the midterms that will determine control of Congress, coupled with September's well-earned reputation as a rough month for investors, were also contributing to investors' defensive mood.

Rising bond yields remain among the most immediate and alarming risks for investors, as the yield on the 10-year Treasury note approaches the critical 5% level. The big fear, according to McElligott, is that a glut of investment-grade debt being issued by companies chasing the AI boom could help to crowd out demand for Treasurys.

Another major test for the market this fall: The IPO calendar is expected to heat up, with at least one blockbuster offering, from Anthropic, and other high-profile names expected to list, as well.

After SpaceX's flashy debut on June 12, Wall Street's red-hot momentum trade suffered what was by at least one measure its worst monthly drawdown in two decades.

Ben Kizemchuk, a portfolio manager at Wellington-Altus Private Wealth, told MarketWatch that upcoming IPOs will represent a stress test for the bull market as the tax drain associated with the end of the fiscal year limits the availability of fresh investment capital. "A heavy IPO calendar could compete for capital at precisely the wrong time," Kizemchuk said.

The impact at the index level has been limited, with the S&P 500 barely falling 5% at its low point, while going just under two months without reaching a fresh record high.

-Joseph Adinolfi