Alert: This Indicator Is Topping Out

The Option Pit VIX Light Is Yellow, and we are going to see strong moves up or down in the VIX.


Hey Traders,


The two biggest VIX indexes are the VIX (volatility on S&P 500 — or SPX — options prices) and the VXN, which is the VIX of Nasdaq 100 (NDX) options.


The SPX and the NDX share many of the same components, especially at the top … 


The six biggest stocks in the SPX are also the biggest stocks in the NDX. These include names like AAPL, GOOG and FB.


However, after the top six, the indexes diverge.


The SPX features a lot of banks, energy companies and industrials in the top 50.


The NDX, on the other hand, includes significant tech and biotech that simply doesn’t rank as high in the SPX.


So, the relationship between VIX and VXN really tells me where the market is moving — both up and down:


  • When the VXN is trading near the same price as the VIX (it almost always trades at some sort of premium)  that is a sign that Tech is booming and maybe getting tired.

  • When the VXN is trading well above VIX, that is a sign that industrials and energy are out performing big tech … It can also be a sign that tech is under pressure.


Take a look at the VIX-VXN spread right now on a 1-year chart:



The spread is at a six-month high — and the highest it  has been since September!


This is a sign that the tech selloff is probably getting stretched. 


With VXN vol as high as it is, I am actively looking to sell puts in big tech names.


The selloff in the NDX (the QQQ ETF) is a little overdone at this point and has likely run its course — unless the whole market turns over … which does not appear to be happening right now.


So, while the spread could widen out further, it really does not have a lot more room to run.


I am looking for opportunities to go long via puts in tech names.

 

The Option Pit VIX Light Is Yellow, and we are going to see strong moves up or down in the VIX.


Your Only Option


Mark Sebastian


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