Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How the VIX Collapse Signals a Regime Shift in Markets
Transcript
- Lucas: So the VIX closed today at 15.95. That is a 28 percent drop in just five days. Three weeks ago we were staring at 22, wondering if the correction had more room to run. Now the fear gauge is basically back to its long-term median. Luna: And the VVIX—volatility of volatility—dropped 20 percent to 87. That is a bigger percentage move than the VIX itself. Lucas: Right. The VVIX at 87 is significant because it tells us the options market is no longer pricing in wild swings in the VIX. When VVIX is above 100, as it was in May, it means traders expect VIX to keep jumping around. Below 90, you get the opposite signal: the market expects volatility to stay low. Luna: So is this the all-clear? The S&P 500 is at 7,538, up 3.7 percent in five days. Nasdaq up 5.5 percent. Everything is green. Lucas: It looks like the all-clear, but I want to be careful. The VIX collapsing this fast has historically been a bullish signal for the next month or two. But the context matters. The yield curve is still disinverted—10-year at 4.48, 2-year at 4.09, that's 39 basis points of positive spread. That's a recession indicator that hasn't fully played out. Luna: The GDP numbers we got in January—real GDP growth at 1.6 percent annualised—that's not boom territory either. It's an improvement from the 0.5 percent we saw late last year, but it's still below trend. Lucas: Exactly. So the question is whether the VIX drop is a genuine regime shift or just a reflex rally in a bear market. I think the VVIX data leans toward regime shift. When VVIX goes from 102 to 87 in a week, that's not just a squeeze—that's a structural repricing of risk. Luna: Let's look at history. The last time we had a VIX spike above 20 followed by a drop to 15 within two weeks was in October 2023. That led to a three-month rally in the S&P 500. Lucas: Good example. But in October 2023, the yield curve was still deeply inverted—minus 40 basis points or so. Now we have positive spread. That changes the macro backdrop. A disinverted curve typically arrives six to twelve months before a recession. So the VIX calm might be the lull before the storm, not the end of it. Luna: What about the VIX term structure? Usually when the front-month VIX drops below the six-month futures, that's a 'contango' signal that says volatility is expected to rise later. Are we seeing that now? Lucas: Yes, and it's pronounced. The front-month VIX at 16, the six-month future around 18.5. That's a 2.5-point contango, which is fairly wide. Historically, that set-up favors selling volatility—but it also warns that the market isn't fully convinced the calm will last. Luna: So the VIX is screaming 'buy,' but the curve is whispering 'be careful.' Lucas: That's exactly it. And I think that's the right framework. For a long-term investor, a VIX at 16 is not a crisis. It's normal. The panic we saw three weeks ago was a spike, not a trend. The question is whether we get another spike before year-end. Luna: And the VVIX at 87 suggests the market is pricing in fewer spikes. But that could change quickly if we get a bad CPI print or some geopolitical event. Lucas: Which brings me to something I think is underappreciated: the VVIX is often a better leading indicator than the VIX itself. When VVIX is high, volatility begets volatility. When it drops, you get mean reversion. The fact that VVIX is now below 90 for the first time since early April tells me the market's 'fear of fear' has subsided. Luna: So for listeners who are wondering what to do: if you have cash on the sidelines, is this a good time to deploy it? Or wait for another VIX spike? Lucas: I'd say deploy slowly. The VIX at 16 is not a screaming buy signal like it was at 30 or 35. But it's also not a reason to stay out. Historically, buying when VIX is between 15 and 20 has produced above-average returns over the next year. The key is not to go all-in at once. Dollar-cost average over the next few weeks. Luna: And if you're a more tactical trader, you could look at VIX futures or options to bet on volatility staying low. But that's a whole different risk profile. Lucas: Exactly. For most people, the VIX is a sentiment indicator, not a tradable asset. Use it to calibrate your risk exposure. If VIX is below 18, you can afford to be more fully invested. If it spikes above 25, that's when you trim or hedge. Luna: Before we wrap, I want to circle back to something you said about the VVIX. That number—87—is it historically low, or just low relative to where we were? Lucas: It's low relative to the recent spike, but not low by long-term standards. The median VVIX over the past decade is around 95. So 87 is below median, but not extreme. In 2017, when the VIX was below 10, the VVIX was often in the 60s. So we're not at complacency levels yet. Luna: That's actually reassuring. Complacency is dangerous. A VIX at 16 with a VVIX at 87 suggests healthy skepticism, not blind optimism. Lucas: I think that's the right read. The market is calm, but not asleep. And if you look at the GDP data—1.6 percent real growth—it's not a booming economy, but it's growing. Combined with the VIX calm, I think the base case is a slow grind higher with occasional 5 percent corrections. Luna: A couple of dollars a month is genuinely what keeps these conversations going—buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: And it really does make a difference. No pressure, but if this show has helped you think about a decision differently, that's the kind of support that keeps it ad-free and focused on the data. Luna: Yeah, exactly. So back to the VIX: if we see another spike above 20, that might be a better entry point. But waiting for it could mean missing a rally. Lucas: That's the eternal dilemma. My take: stay invested, keep some dry powder, and use VIX spikes as buying opportunities rather than panic triggers. The data this week supports a cautiously optimistic outlook. Luna: Alright, that's a solid framework. Thanks Lucas. Lucas: Thanks Luna. See you next time.