The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move wildly.

The S&P 500 tried to rally above 4000 on Monday.

The VIX got crushed; down 1.14 points on a Monday is a big move for VIX.

But why are things rallying?

There is a quasi-banking crisis, the economy might go into recession, oil is dropping, inflation is still high …

So how can the S&P 500 be so high?

Well, there’s been a huge shift for the near term in how the market works.

Normally when the market is fearful, we see three things rally: 

Treasuries, the dollar, and consumer staples.

Bonds have made a nice move higher as expected:

Now, the dollar? It’s gotten softer …

Most surprising is the Consumer Staples Select Sector SPDR Fund (Ticker: XLP) rolling off the lows, but really on because the S&P 500 has.

It is not outperforming:

It’s doing nothing! Why?

The flight to safety has changed.

With rates this high, anytime rates are falling money doesn’t pour into staples or the dollar.

Instead, it goes here:

And here:

The flight to safety for capital is the two largest stocks in the S&P 500: technology stocks.

Alphabet Inc. (Ticker: GOOGL) has a pretty similar chart as well.

Thus, while there has been a banking crisis, the QQQ has just gone up:

So risk off is currently QQQ.

Risk on? XLF and XLE.

This is why those ETF’s did so well on Monday while the QQQ flailed.

So what does that mean for trading going forward?

It is entirely possible we could see the S&P 500 meander higher coming out of a banking crisis on the back of XLE and XLF …

While the QQQ actually goes down like it did on Monday.

If things are calming down, buy puts in QQQ and go long XLF and XLE.

Questions about that? Comment below!

Your Only Option,

Mark Sebastian