One Warning Light Flashing Yellow

Hey Traders,

The S&P 500 (Ticker: SPX) tried to scare everyone on Thursday, only to end the day down a measly 15 points.

I think the SPX is probably going to have a nice rebound on Friday …

Of course, I could be wrong, because there is still one indicator saying “look out!"

What am I seeing?

On Thursday the VIX closed at 17.01; not high, but certainly well off the lows from last week.

So where is it headed to next?

VIX curve would say lower, because we are in a nice, steep contango (when futures are trading higher than spot price):

I continue to think (as I stated yesterday) that there is a real risk of the VIX falling apart and ending up with a sub-16 or even sub-15 settle in the next few days.

However … if I am wrong I do have a warning.

Three of my four indicators are saying the VIX is red (the VIX curve, VIX correlation with the S&P 500, and VIX realized vol).

But one is signaling the VIX is in the yellow: CBOE VIX Volatility Index (Ticker: VVIX), the VIX of the VIX.

Check out the price action of VVIX:

VVIX is now over 120 and appears to be heading nearly straight up!

So if it turns out I am wrong, and the VIX actually blows up, this is the warning sign …

Do I think VVIX, one of my secondary VIX Light indicators, is right?

No, I don’t.

But I am not perfect.

Here is the key …

When one of my other indicators is tripped and starts to tell me the VIX is going higher, I know exactly what to do …

But for now I am going to continue leaning short.

Your Only Option,

Mark Sebastian

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