The Option Pit VIX Traffic Light Is Red: Volatility is likely to slide.
Hey Traders,
We are now a week into the new year. The QQQ has rallied at a torrid pace … it’s pulled the other major indexes along with it.
The QQQ is up 37.4% in 2023 so far, the SPY is up 14.67%, and the DIA (the laggard of the group) is still up 1.84%.
Across the board, stocks are up … or are they?
Here are six of the biggest ETFs in the S&P 500 returns year to date:
XLK and XLY are up north of 30%. XLB and XLI are up about 7%. XLF, on the heels of the Mid-cap banking crisis, is down over 2%. Energy, the driver of the economy in many ways, is down 7%.
This is why you’re seeing such different returns among the indexes. QQQ is almost exclusively XLK and XLY, SPY is all of these but more heavily XLK and XLY right now, and the DIA is actually the most evenly distributed among these ETFs.
Now, XLK has outperformed the rest of the ETFs for a while – check out the five year chart:
XLY has typically NOT had the kind of performance we have seen in the first half of the year. And energy, which had a GREAT 2022, is frankly just starting to catch up.
But I also want you to notice something very important about XLK and its relative performance to the other ETFs.
It’s now stretched above the other ETFs to the widest degree that it has been at any point in the last five years.
Even going back ten years, this holds true:
XLY has been the consistent number 2 in this group, but its performance in 2023 has paled in comparison to XLK.
When a specific ETF gets THIS stretched, bad things happen.
There’s a massive rotation trade developing in the ETFs. XLK is sitting just off an ALL time high. The rest of the ETFs are … not.
In the coming days, I’m going to be setting up smart plays to take advantage of how overbought XLK is relative to every other ETFs – plays that make a lot of money if the market continues to rally.
And I’ll RAKE if this spread comes back down to earth.
I’m saving the exact trade for my Trading Desk members, but visually you should be able to figure a couple of things out here.
Questions about that? Leave a comment below!
Your Only Option,
Mark Sebastian