VIX Over 30 in Backwardation: What It Means for the S&P 500

Four weeks of red and counting

Mark Sebastian

Hi Traders,

Another ugly week for the market. This is now four weeks in a row where the S&P 500 (SPX) and the Nasdaq 100 (QQQ) have been down. Frankly, I don't see a lot of reasons for the market to rally until the Strait of Hormuz finally opens up again.

The VIX is now over 30 and in a fully backward curve:

When you see the VIX in backwardation (near-term fear priced higher than future fear, like flood insurance costing more during the storm than after), it's telling you the market is NOT logical. All the fundamental analysis and technical analysis you do is pretty much worthless.

Take the S&P 500. It has plowed through every level of support with ease over the last few weeks.

The 200-day moving average (one of THE strongest moving averages in the market) got run over without a second thought. Even round numbers for SPX have meant nothing.

When the Strait Opens, Watch Out

When that strait opens up, and before private credit becomes the next headline, I expect a rally that behaves in similar fashion, but faster. The selling in the S&P 500 has been consistent but not crazy. We haven't had a day where we closed down more than two percent in a single session during this conflict.

The rally out of a deal will likely be four to six percent in a single day.

So if you're long puts in SPX, QQQ, iShares Russell 2000 ETF (IWM), whatever, it's worth it to own a cheap out-of-the-money call. They could come into play faster than you think.

One to Buy

iShares 7-10 Year Treasury Bond ETF (IEF): As Tim Colby, our head of Macro Trading, pointed out, bonds actually rallied on selling Friday. We might be getting to the point where safe havens really start to move higher. IEF is the best ETF to capture that flight-to-safety move in the bond market.

One to Sell

Nvidia (NVDA): The mess with Super Micro Computer (SMCI) is over time going to be a problem for Nvidia. Frankly, if the market keeps rolling over and the economy slows down, NVDA is going to be a huge loser if AI investment even gets a hint of slowing further.

Your only option,

Mark Sebastian

Pit Report

Mark Sebastian

Mark Sebastian is a former member of both the Chicago Board Options Exchange (CBOE) and the American Stock Exchange (AMEX), where he spent years mastering the art of options trading in the most competitive environment imaginable. As Chief Investment Officer at the hedge fund Karman Line Capital, Mark manages sophisticated options strategies for institutional clients. He is the author of two highly regarded books on options trading: ‘The Option Traders Hedge Fund’ and ‘Trading Options for Edge.’ Mark is a frequent guest on major financial networks including CNBC, Fox Business News, Bloomberg, and First Business News, where he provides expert commentary on market volatility and options strategies.