Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the VIX at 15 Point Zero Three Is a False Comfort
Transcript
- Lucas: The VIX closed at 15.03 on Friday. That's the lowest we've seen in about three months, and on the surface, it looks like the market is shrugging off every worry you could name — tariffs, a slowing economy, you name it. Luna: And a lot of dip buyers are looking at that number and thinking, 'Great, fear is gone, time to load up.' But you're not buying that. Lucas: Not at all. Because while the VIX is down, the VVIX — the volatility of the VIX, essentially the price of options on VIX futures — is at 87.28. That's up slightly over the past week and near its 90-day high. And that divergence is screaming something different. Luna: So the VIX itself is calm, but the market for hedging against VIX spikes is pricing in more risk. That's a gap worth looking at. Lucas: Exactly. Think of the VIX as the market's temperature reading. The VVIX is the barometer — it tells you how likely the temperature is to swing suddenly. When the VVIX is elevated while the VIX is low, it often means options dealers are charging a premium for tail risk. They're saying, 'Yeah, things are calm now, but the chance of a violent move is higher than usual.' Luna: And we've seen this pattern before — ahead of sell-offs in 2018, early 2020, even last August. It's not a perfect signal, but it's warning you to be careful. Lucas: Right. And the reason it matters today is that we have a lot of macro crosscurrents that the VIX is simply not pricing. The yield curve is still inverted — well, technically the 2-year versus 10-year spread is positive at 35 basis points, but that's down from 38 a week ago, and it's still extremely flat by historical standards. Luna: So the bond market is still signaling recession risk, even if the stock market VIX isn't. Lucas: Precisely. Bonds have been a better recession predictor than stocks for decades. When the curve is this flat, it usually means the market expects the Fed to cut rates soon because the economy will need it. But the VIX is at 15 — that's below its long-term average of about 19. So either bonds are too pessimistic, or stocks are too complacent. Luna: And you think it's the latter. Lucas: I do. And the VVIX is the tell. Let me give you the mechanics. The VVIX is calculated from the prices of options on VIX futures. When it's high, it means options on volatility are expensive. That makes sense if dealers expect a volatility event — like a sudden spike in the VIX. And a VIX spike usually coincides with a market drop. Luna: So what level of VVIX should make us nervous? It's at 87 now — where has it been historically? Lucas: The long-term median for the VVIX is around 85. So 87 is slightly above median, nothing extreme. But context matters. During the calm periods of 2017, the VVIX averaged around 70. In 2019, before the COVID crash, it averaged around 75. So 87 is elevated relative to those low-vol regimes. And when the VIX is already low, a VVIX above 85 tends to precede a volatility breakout about 60 percent of the time, depending on how you measure. Luna: That's a decent edge. So what's your read? Are we heading for a 20-plus VIX soon? Lucas: I'm not making a precise call, but I think the asymmetry is against dip buyers here. If the VIX stays low, great — you didn't lose anything by being cautious. But if it spikes to 20 or 25, the S&P 500 could easily drop 5 to 10 percent. And that's a risk that the VIX at 15 is not capturing. The VVIX is capturing it. Luna: And I'd add that the Russell 2000 is down 1.1 percent over the past week, the Dow is down 0.8 percent, while the S&P and Nasdaq are up. That's a classic divergence — small caps selling off while mega-cap tech holds up. It often precedes a broader pullback. Lucas: Yeah, that's the other piece. Small caps are more sensitive to recession fears and credit conditions. They're telling a different story from the Nasdaq. So you've got the VIX low, but the VVIX high, small caps weak, yield curve flat — that's a mosaic that says 'caution' rather than 'all clear.' Luna: And this kind of analysis is exactly why we keep this show ad-free — so we can dive into things like the VVIX divergence without worrying about sponsor messaging. If our conversations have helped you think about a risk or a trade differently, you can support the show at buy me a coffee dot com slash fexingo. It's a simple way to keep us independent. Lucas: Yeah, we really appreciate that. And we mean it — listener support is what keeps us going. So, back to the divergence: if you're a dip buyer looking at the VIX at 15, I'd say wait for either the VIX to come down further or the VVIX to drop below 80 before getting aggressive. Otherwise, you're essentially betting that the options market is wrong about tail risk. Luna: And maybe it is wrong. But the odds aren't in your favor. Lucas: Exactly. And the other thing I'd watch is the 10-year yield at 4.54 percent. It's down a couple of basis points from last week. If it continues to fall, that's bond traders saying growth is slowing. The VIX might not react immediately, but eventually it will. Luna: So your takeaway for listeners is: don't confuse a low VIX with a safe market. Look under the hood at the VVIX, look at the yield curve, look at small caps. Lucas: Right. The VIX is a snapshot of current fear. The VVIX is a forecast of future fear. Right now, that forecast says the calm may not last. Luna: Alright, good stuff. I'll be watching those levels this week. Lucas: Same. Thanks, Luna.