Volatility futures flipped into backwardation today. The VVIX headed into the close north of 110, a level I call the foamy zone.
That inversion means the market sees more risk over the next 33 days than over the next 61. When the curve inverts like this, the probability of outsized moves in the SPX goes up by an order of magnitude.
The S&P 500 dropped 1.25% on Friday. The NASDAQ fell almost 3%.
At least $1.4 trillion in market cap disappeared today. My guess is the real number sits closer to $2 trillion.
On Wednesday, the S&P 500 sat basically at its all-time high. Two days of selling later, I’m already hearing clients ask which dip to buy.
I’m telling them to slow down.
The advance decline line sits at 50/50. Traders are still thinking and rotating instead of dumping everything at any price.
Financials finished green today. Regional banks barely moved. Money ran into consumer staples, utilities, materials, Walmart (WMT), and Costco (COST).
Real panic doesn’t pick and choose. It hits everything at once.
When that day comes, the financials will feel it. Somebody is holding the risk on CoreWeave, and its credit default swaps price default at roughly a coin flip.
Semiconductors worry me the most. Open a 15-year chart on AMD, Micron (MU), Intel (INTC), Broadcom (AVGO), or the SMH.
Each one has hit what I call the wall. Several have already started slipping back down.
In tonight’s video, I walk through the levels and the data that have me cautious:
The S&P 500’s central point of trade since May 4th sits near 7560 after the contract roll. Getting there would take roughly another 130-point drop.
The NASDAQ has broken below 29,000 only once in the last six months. That break snapped 2,000 points out of the index in a matter of days.
Last week priced a $95 expected move. The S&P 500 moved $86 today alone, and next week prices about $170, which puts volatility 70% to 80% higher.
AMD fell another 6% today. South Korea’s EWY is down more than 20% in two weeks, a hit as bad as the 1987 crash.
Broadcom reached roughly 500 and now trades near 330. Taiwan Semiconductor (TSM) slid from 490 to 410 despite strong earnings.
If you buy this dip, use a slightly out of the money call spread. Paying around $1.54 for a $5 widespread keeps your risk defined, and I’d skip the futures entirely.
We will bounce. Taiwan Semiconductor and the EWY both look ready for a rip your face off rally.
I’d trade any bounce short and consider selling into it. It’s October, and Monday could just as easily bring a bounce as a Black Monday.
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