Schaeffer's Trading Floor Blog

By the Numbers: VIX vs. VXN

Analyzing the Tech-Sector Volatility Boom

by 4/8/2014 7:19 AM
Stocks quoted in this article:

I bet you didn't know that the CBOE Volatility Index (VIX) isn't the only volatility index out there. I realize that I'm part of the problem... I use it as my go-to volatility proxy about 100% of the time, mainly because it's the index that everyone is most familiar with.

But hey, let's reduce that VIX-iness to 99.9%. I want to take a look at another volatility index out there. I bring you the CBOE NASDAQ 100 Volatility (VXN), the VIX of the Nasdaq Composite (COMP). Here's how it looks in 2014 (click chart to enlarge):

VXN in 2014
Chart courtesy of TD Ameritrade

The VXN pretty much acted just like the VIX until very recently. But then, the mass exodus out of momentum stocks started gaining, well, momentum. The PowerShares QQQ Trust (QQQ) is dominated by big tech, but still a decent proxy of "fast"-money sorts of names. And it got quite ugly last week (click chart to enlarge):

QQQ in 2014
Chart courtesy of TD Ameritrade

While the VXN doesn't look so extraordinary on that first chart, it's actually leapt past the VIX in a big way. Here's how the VXN/VIX ratio looks in 2014 (click chart to enlarge):

VXN_VIX Ratio in 2014
Chart courtesy of TD Ameritrade

It has jumped off the charts. The VXN is normally a little higher than the VIX; the typical 5% premium you see on the chart is fairly normal since the tech bubble. In the last week, that premium jumped to about 35%. It's not just a 52-week high, either (click chart to enlarge):

VXN_VIX Ratio since 2004
Chart courtesy of TD Ameritrade

It's the highest ratio we've seen since (gasp) 2007!

That sounds ominous. But alas, there's a positive spin. The volatility ratio was actually moving in the opposite direction on the last go-round. In hindsight, the signal was volatility actually moving out of tech and into (eventually) financials.

I'd classify all this as mildly interesting, but not likely to portend much in and of itself. A flight out of momentum will probably turn into a flight out of anything that's a stock, but then ultimately lead to a flight into higher-quality names. That's not really a bad thing.

If nothing else, though, it's a fun exercise in picking chart endpoints. In 2001, the VXN/VIX ratio was just under 2.5. The ratio of 1.35 in 2004 was pretty close to all-time lows at that point. I'm sure someone somewhere said, "Wow, tech volatility looks dirt-cheap here. I wonder why no one's worried about momentum names?" Yesterday's bottom is today's volatility explosion.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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