1/9 Daily Market Note: VIX Goes Further Along in Contango
NVDA helps the S&P 500 to Suppress the VIX.
Good afternoon everyone!
Nvidia’s new developments shown at the 2024 CES Tech Event represented the fundamental event to drive a large breakout above the $500/share level, which offered triple resistance for much of 2023. Although it’s only a 3.85% representation in the Nasdaq QQQ (and NQ), NVDA is carrying much of the semiconductor ecosystem to flatten out the selling activity that we have seen since the start of the year. Apple’s announcement of its Vision Pro Headset also contributed to a tech recovery.
Longer-term, I'm unsure how much mass-market adoption that Apple’s launch of its Vision Pro headset will generate, but that’s a concern for a later day as their earnings outcome and outlook is set for February 1st. The focus for now was that Apple saw a statistically-telegraphed bounce at oversold levels last week and it served to be a decent entry on almost any vehicle chosen for a tradable bounce.
Despite the sentiment malaise that a lot of investors may be feeling due to the subdued start to 2024 for the S&P 500, the VIX continues to stay firmly in Contango – a state where forward prices are higher than spot prices. In short, institutional investors are not paying up for near-term hedges and they will let time (theta) allow the spot and future prices to eventually converge, causing current VIX suppression.
There will be warning signs of greater volatility in U.S. markets ahead when the VIX starts to signal Backwardation and away from Contango, but for now, I am not seeing that just yet. Of course, I’ll let folks know when I do see such an event. The rise of 0DTE options has perhaps permanently changed the VIX’s term structure and its effectiveness in hedging market downside.
What this mean for VIX-related products such as UVXY/VXX?