The volatility futures inverted this morning, and they haven’t done that in six months.
VIX futures let traders bet on where the VIX, Wall Street’s fear gauge, will be in the months ahead. Normally, protection further out costs more. When they invert, traders are paying up for protection right now, and I’m not taking that lightly.
What Happens When Market Makers Sell Into The Selling
When the S&P sells off, market makers are dynamically trying to offset their risk. They’re not trying to buy. They sell into the selling to neutralize their directional risk.
Now add inverted volatility futures. Any more selling inverts them even further, a ton of traders start taking heat, and they protect themselves by selling futures.
It doesn’t mean we’re going down hard. It means if the market starts to sell off again, it’ll exacerbate the move substantially, and you don’t want to trade against what the volatility futures say.
Why NASDAQ 29,000 Was My Line In The Sand
I’ve been saying it for a while. Get under 29,000 on the NASDAQ, and all hell breaks loose. This morning, we went under it.
From here, there are two scenarios. Number one, the NASDAQ rallies back, and they dump the financials, staples and healthcare they’ve been hiding in. Number two, they dump those sectors, and the NASDAQ goes down right along with them.
The second one is what we call higher degrees of correlation, everything moving lower as a unit, and that’s the threshold this market is sitting on.
Intel Was Priced To Move $9 And Moved $30
The moves on earnings this season have been outsized. Intel was positioned to move about $9, and at one point it moved $30, a three-standard-deviation move for a half-trillion-dollar company. AMD dropped 10% before it even reported.
My earnings flips have been rough this season because of it, and I’m not going to sugarcoat that. But this is not the kind of market where you force something. Don’t go rushing to catch a falling knife, because you’re not going to survive it.
Volatility like this doesn’t come around often, and the election is Tuesday.
When the volatility futures are this stretched, the moves get bigger in both directions, and that’s where the money is made if you’re positioned for it. Find out how we trade the VIX when the market panics.
To your success,
Don Kaufman
P.S. Nobody ever remembers the good trades. Back on Aug. 17, I paid $1.90 for a spread in Intel. This morning, it was worth about $10.50, and I locked in one of them for close to a 500% gain.
