Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Buy the Dip in a Top-Heavy Nasdaq The Data Says Wait
Transcript
- Lucas: So the Nasdaq is down more than 5 percent in the past five trading days. That is a real sell-off by any measure. But here is the question that is bugging me — does buying the dip even make sense anymore when the dip is happening in an index that is more top-heavy than it has ever been? Luna: Right. Because the Nasdaq is not really five thousand stocks right now. It is basically Apple, Microsoft, NVIDIA, Alphabet, and Amazon with a few friends. Lucas: Exactly. As of the end of May, the top five names in the Nasdaq 100 accounted for over 40 percent of the index weight. That is up from about 25 percent three years ago. So when you say 'the Nasdaq is down five percent', what you are really saying is those five stocks are down an average of maybe six or seven percent, and everything else is down less or even flat. Luna: And that changes the calculus on buy the dip because you are not buying a broad basket. You are buying a concentrated bet on megacap tech. Lucas: Precisely. And the data from this week shows that divergence clearly. The Dow is only off 0.4 percent over the same five days. The S&P 500 is down 2.8 percent. So the pain is really concentrated in the growth-heavy names. The VIX spiked 34 percent to 21.51, which sounds scary, but that is still below the long-term average of around 20. Luna: But the VVIX — the VIX of the VIX — is at 102. That is up 11 percent. So options dealers are pricing in a lot more uncertainty about where volatility itself is headed. Lucas: And that is the interesting signal. The VIX at 21 says 'moderate stress'. The VVIX at 102 says 'the market doesn't trust that the VIX will stay at 21'. It is expecting either a sharp snapback or a further spike. That is not a normal buy the dip environment. Luna: So what do you do? If you have been sitting on cash and waiting for a pullback, is this the entry point or is it a trap? Lucas: I think you have to look at the yield curve and the macro backdrop. The 10-year Treasury yield is at 4.47 percent, the 2-year at 4.05 percent, so the curve is positively sloped by about 38 basis points. That is actually a healthy configuration — it means the bond market is not pricing in an imminent recession. But the three-month yield is at 3.78 percent, so short-term money is still earning a decent return. That gives investors an alternative to just buying equities on every dip. Luna: And the jobs report on Friday was hot. The Fed is not cutting soon. Chair Warsh has been pretty clear about that. So the 'Fed put' is not really in play right now. Lucas: Exactly. The old buy the dip playbook relied on the assumption that the Fed would always step in with easier policy if markets fell enough. That assumption is weaker now. So when you combine a top-heavy index, a VIX that is not yet at panic levels, and a Fed that is on hold, the case for waiting a bit longer gets stronger. Luna: But what about the equal-weight Nasdaq 100? That has outperformed this year by a few percentage points. If someone is worried about concentration, why not just buy that? Lucas: That is a valid approach. The Invesco S&P 500 Equal Weight ETF, for example, has a lower concentration risk. But even the equal-weight Nasdaq still has a tech bias. And the liquidity in those smaller names can be worse during a sell-off. So you might get better diversification but less price stability. Luna: So is the real takeaway here that investors should not blindly buy the dip in the Nasdaq, but maybe look at sectors that have been left behind? Like financials or energy? Lucas: I think that is a more thoughtful strategy. The Dow's resilience this week suggests that value and cyclical stocks are holding up better. If you look at the economic data, real GDP growth is at 1.6 percent annualized, which is not booming but not recessionary either. So there is a case for rotating into areas that benefit from steady growth rather than relying on a handful of tech names to lead you higher again. Luna: Speaking of which, I have been looking at the VIX futures curve. It is in contango, but the front-month is at 21.5 and the second month is around 22. That is a pretty flat curve. Normally in a sell-off, the front month spikes above the back months — backwardation. The fact that it is still in contango suggests that this sell-off, while sharp, is not seen as a crisis. Lucas: That is a crucial point. Backwardation in VIX futures is a hallmark of panic. We are not seeing that. So the market is treating this as a correction within a bull market, not the start of a bear. But that does not mean you should be aggressive with new money. I would rather see a VIX above 25 before I start adding aggressively to the same names that are already 40 percent of my index. Luna: So your strategy is: wait for a VIX spike above 25, or for a clearer signal that the Fed is turning dovish, or for the Nasdaq to fall another 5 to 10 percent? Lucas: Roughly, yes. But I would add one more condition: look at the equal-weight index vs the cap-weighted index. If the equal-weight starts to outperform on the way down, that means the selling is broadening out, which is actually healthier. Right now, the cap-weighted Nasdaq is down more than the equal-weight, which tells us the megacaps are leading the decline. That is a sign that the market is repricing the 'AI premium' that had been baked into those stocks. That repricing might have further to run. Luna: I think this is a really good framework for listeners who are sitting on some cash or who have been thinking about rebalancing. Let me ask this — do you think the old adage 'never catch a falling knife' applies here? Lucas: It always applies. But I think the more precise version is: 'do not catch a falling knife if the knife is a single sector with extreme concentration.' If this were a broad market sell-off where everything was down equally, the risk of picking a bottom would be lower. But when the selling is concentrated in the names that had the most euphoric valuations, the knife is sharper. You want to let it hit the floor and bounce before you grab it. Luna: So for someone listening who has a long-term horizon and is dollar-cost averaging into an index fund, should they just keep doing that? Or pause? Lucas: Keep doing it. Dollar-cost averaging is designed for exactly this scenario. If you have a monthly contribution into a broad market ETF like VTI or a global fund, you are buying more shares at lower prices now. That is the whole point. The mistake would be to stop contributing out of fear, or to lump-sum a big bonus into the Nasdaq right now. Luna: That makes sense. So the nuance is really for people who have a lump sum or who are thinking about tactical allocation. For the steady monthly saver, just keep going. Lucas: Exactly. And you know, this kind of conversation is exactly why we do this show. We try to cut through the noise and give you something actionable. If that has been valuable to you, we have a small ask. This show is ad-free and listener-supported, so if you have gotten something out of our episodes, you can support us at buy me a coffee dot com slash fexingo. It is a simple way to keep us going without any corporate sponsors. Luna: Yeah, and we really appreciate it. It helps us keep doing deep dives like this one. Now back to the market — one thing I want to mention is that the VIX term structure also shows the third month at 22.5, so there is a slight premium for further-out volatility. That suggests options traders are hedging for a longer period of uncertainty. Lucas: Which reinforces the idea that this is not a one-week event. The market is pricing in elevated volatility for at least a couple of months. So if you are a buyer of individual tech stocks, you might want to consider using put spreads or collars to protect yourself while you accumulate. But for most people, the simple approach of continuing your systematic investment plan is the way to go. Luna: And if the VIX does hit 25, then what? Do you go all in? Lucas: Not all in. But I would start scaling in with perhaps 25 percent of your cash reserve at 25, another 25 percent at 28, and so on. Laddering in is always better than trying to pick a single bottom. And I would tilt towards equal-weight indices or value sectors rather than just piling into the megacap tech names that got you into trouble in the first place. Luna: So to summarize: the current sell-off is concentrated, not broad. The VIX is up but not panicking. The yield curve is normal. The Fed is on hold. And the best move for most investors is to stay the course with DCA, but be patient with lump sums. Lucas: That is a perfect summary. And one last thing — keep an eye on the VVIX. If it starts to fall while the VIX stays elevated, that would be a signal that the options market is becoming more comfortable with current volatility levels. That would be a green light to be more aggressive. Until then, patience.