NEW YORK (Reuters) -Wall Street's most watched gauge of investor anxiety rose to a near five-month high before paring gains on Tuesday as U.S. stocks whipsawed on renewed concerns over a U.S.-China trade conflict.

The Cboe Volatility Index - an options-based indicator that reflects demand for protection against drops in the stock market - was last up 0.7 points to 19.68. The index had reached 22.94, its highest since May 23, earlier in the day.

A reading of 20 or higher on the VIX is associated with robust demand for options protection. 

The recent rise in the index - often called the "Wall Street fear gauge" - pointed to investors waking up to the risks that lurk for stocks after an extended period of market calm that enveloped markets even as equities logged new record highs.

Tuesday's market moves follow a sharper selloff on Friday when the S&P 500 dropped 2.7%, its largest drop in six months.

On Tuesday, the benchmark index fell as much as 1.5% before recovering to trade up 0.2%, after Federal Reserve Chair Jerome Powell said the central bank may soon end its balance sheet runoff, easing investor concerns over tight financial conditions.

"It had been really, really quiet and so all those people who were asleep had to wake up," said Jim Carroll, senior wealth advisor and portfolio manager at Ballast Rock Private Wealth in Charleston, South Carolina. 

"Part of what we saw on Friday was a scramble for protection ... once the scramble starts then it becomes, you know, chasing protection instead of chasing returns and you get this big VIX pop," Carroll said.

Some investors have been opportunistically adding protection to their portfolios. 

At least one trader took advantage of Monday's retreat in volatility to buy short-term hedges via October 24 put spreads in both the S&P 500 index-tracking SPDR S&P 500 ETF Trust ( SPY ) and the Nasdaq-100 index-tracking QQQ ETF, according to a note by Susquehanna International Group derivatives strategist Christopher Jacobson. Put options convey the right to sell stock at a fixed price in the future.

While investors remained nervous about the near-term outlook for stocks, there was little sign of outright panic in the market. 

The VIX futures curve, a snapshot of prices of futures contracts on the volatility index across different expirations, painted a less fearful picture.

"It's very flat," said Joe Tigay, portfolio manager for Rational Equity Armor Fund. 

"It kind of is saying that this volatility might be short-lived," said Tigay, who has been taking advantage of the jump in market swings to sell volatility even as he stands ready to pick up more protection if stocks were to recover and markets turn calm again.