Schaeffer's Trading Floor Blog

The New Face of Big-Cap Technology

Checking in on the price action of the VXN versus the VIX

by 4/17/2014 7:29 AM
Stocks quoted in this article:

If you spent the first three-and-a-half months of 2014 in a cave well, first of all welcome back! We knew you were away, so we decided to make sure that SPDR S&P 500 ETF (SPY) didn't move much for you. It's up 0.8% in 2014 nothing to see here, move along.

Okay, of course I kid. I mean, who spends time in a cave in order to avoid watching the market anyway? It's a lazy way for me to say, "Hey, we're moving around a lot and going absolutely nowhere."

But alas, we're only not moving in an S&P 500 Index (SPX)-centered world; small-caps and momentum stocks and Nazz names are all over the place.

We noted a couple weeks ago how Nasdaq volatility has exploded on a relative basis versus S&P 500 volatility. And since then, the relative pop has gotten even more extreme. Here's the CBOE NASDAQ 100 Volatility (VXN) (the VIX of the Nazz) vs. the CBOE Volatility Index (VIX) over the past year. (Click on the charts to enlarge.)

Daily chart of VXN versus VIX Since April 2013

The ratio keeps figuratively jumping off the charts. It's the highest level since very early 2007.

VXN versus VIX Since 2001

It's important to remember that the nature of big-cap tech has changed over the years. Back in 2001, the typical bigger-tech name was some combo of newly listed, relatively small versus the Exxon Mobil Corporations (NYSE:XOM) of the world and/or much more volatile than the typical big-tech names today.

As time went on, some of the biggest Nazz names turned up as some of the biggest names overall. And they behaved just like regular, non-volatile large stocks. The volatility of the Nazz overall converged towards the volatility of the S&P 500.

Long story short, this is a pretty spectacular divergence we're seeing right now. This isn't 2001 bubbly tech taking a tumble.

The 10-day realized volatility (RV) in PowerShares QQQ Trust (QQQ) hit 27 earlier this week. That's not historically enormous, but it's the highest reading since December 2011. The 10-Day RV in SPY has lifted lately, too, but "only" to 17 -- a level it's hit probably 20 times since December 2011.

I'd like to make some grand-macro call based on all this, but it's not so simple. The ratio spiked from 1.12 to 1.65 over the course of 2006, then peaked almost exactly on New Year's Eve. The market as a whole then got shaky and would ultimately peak in a big way in October 2007. So, by that sample size of one, it suggests the market tops out 1-1.5 years from now. That sounds like a somewhat realistic timetable but again, that's based on squinting at a pattern that happened once.

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

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