Until This Happens, The Market Will Stay Sick

The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders,

Thursday was a bit of a blood bath, and Friday has some follow through.

But what is causing this selling? Why are we threatening 4,600 again in the S&P 500 (Ticker: SPX)?

And what does this mean for VIX?

Earnings season is upon us.

We saw some strength in the airlines on Thursday, though then that quickly evaporated.

The first of the big banks has reported … and it is not good.

So is that the reason the VIX is over 20?

No.

The answer continues to lie in the Nasdaq 100 (Ticker: NDX) and in ARK Innovation ETF (Ticker: ARKK) funds.

Compare the returns of ARKK (red) vs the Invesco QQQ Trust (Ticker: QQQ) over the last three months:

ARKK has taken a nosedive, while the QQQ is actually flattish.

Why?

Megacaps.

Here is QQQ (red) vs Apple (Ticker: AAPL):

Think of ARKK as being the non-megacap portion of the QQQ, and AAPL as a representation of the megacaps.

Underneath the flattish QQQ over the last three months, there is a lot of softness.

Remember, the non-megacaps represent about 52% of the QQQ value, but account for 93 of the 100 stocks in NDX.

Until ARKK recovers, the market is going to be sick.

That said, on a day we are down about 40 points in SPX, the VIX is not really reacting, and VIX futures are not really moving much.

Over the next day or two, we could be in line for an UGLY move in VIX, but it could be the final flush out in ARKK that causes that.

Once ARKK bottoms, the market might be in a position to begin a move higher.

Your Only Option,

Mark Sebastian

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.