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VXN converging to VIX

Nasdaq markets have been dominated by some of well know large cap tech companies and many smaller less know names too. Not surprisingly, Nasdaq markets measured by NASAQ-100 have been much volatile than SP500. However, since tech bubble busted in 2000, the Nasdaq volatiles measured by VXN declined dramatically and has gradually converged to broad market volatility represented by SP500, VIX (see Bloomberg chart below). Actually, as credit and mortgage market began to melt 18+ months ago, VIX and VXN have been almost in parities. SP500 was much volatile than NASDAQ100 in two of these period, first when Bear Sterns hedge funds fiasco and second time happened in last Nov when financial system was in the breaking point. Financial sector was the one of largest sectors until last year because of market value evaporation from some celebrated financial names, like Bear Sterns, FNMA and Freddie, Lehman and Citi. Almost all these financial firms were traded at the big board and are members of SP500. For the first time in history, we saw VIX and VXN essentially at the same level. Are we going to see the VIX gradually back down and traded at discount to VXN down the road when the credit mess is finally over or does the market structure change from this financial system shake-up? I guess only time will tell.

One of interesting observation today is that VIX and VXN stay in synch throughout today trading except in the final moment VXN drop 4 points in the last half hour for no obvious reason even though the selling of NASDAQ100 was accelerated in the closing hour. Is this mean tomorrow going to be a good day for QQQQ?





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