Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / Reading the August Lull in a Falling VIX
Transcript
- Lucas: So the S&P 500 is sitting at 7,692, down about 0.7 percent over the last five sessions, but here's the thing that catches my eye — the VIX is up nearly nine percent in that same window, and it's back above 15.8. Luna: So after a month of that sleepy, sub-15 tape, we're finally seeing some life in the volatility complex. Lucas: Exactly. And I think for day traders, that's the story of the week. We've had this extended period where the VIX was drifting lower, making range-bound plays almost too easy. But now, with the VIX climbing while the index is just pulling back slightly, that's a divergence worth paying attention to. Luna: A rising VIX with a modest dip in the S&P — that's not a crash signal, but it does suggest the market's getting a bit more nervous. Lucas: Right. And when I see that, I start thinking about how I want to position my intraday trades. The first thing is, I'm going to reduce my share size. I don't want to be as aggressive when volatility is climbing because the ranges get wider and the fakeouts get more frequent. Luna: So you're essentially saying, lower leverage, tighter stops, maybe switch to a more mean-reversion style rather than chasing momentum. Lucas: Exactly. And one of the things I look at is the VVIX, the volatility of the VIX. That's up almost five percent today, and when you see that kind of move, it tells me that the options market is starting to price in bigger swings in the VIX itself. That's often a leading indicator for realized volatility in the broader market. Luna: So if the VVIX is climbing, it's like a warning that the calm might not last. Lucas: Exactly. And we've seen this pattern before. Last year, when the VIX was in the mid-teens and the VVIX started to creep up, we got that August squeeze that caught a lot of people off guard. I'm not saying that's going to happen again, but it's worth respecting the signal. Luna: What about the small caps? The Russell 2000 is down 0.9 percent over the past five days, a bit steeper than the large cap indices. Is that part of the same story? Lucas: It is, and I think it's actually a more important signal than the headline indices. Small caps are more sensitive to interest rates and growth expectations. When they start to lag, it tells me that the risk appetite is shrinking. And that's exactly what we're seeing with the Russell down 0.9 percent while the S&P is down 0.7 percent. Luna: So it's not a big divergence, but it's in the direction you'd expect if the market's getting more cautious. Lucas: Right. And that's the kind of thing I look for in the first hour. If the Russell is underperforming the S&P during the opening range, I'm going to be more cautious with my long ideas. I might even look for short opportunities in the weakest sectors. Luna: And what about the bond market? There's that headline about bond market pressure squeezing Main Street. Does that factor into your day trading at all? Lucas: It does, indirectly. When you see the ten-year Treasury yield moving up, which I think it is around four and a half percent or so, that puts pressure on growth stocks and high-multiple names. So even if the index is flat, you can have a lot of red in the Nasdaq, which has been down over one percent in the last five days. That's a meaningful move. Luna: So the Nasdaq is actually the weakest of the big three over the past week. That's a clue that the tech trade is cooling off. Lucas: Exactly. And that's a big deal for day traders because tech and momentum names are where most of us make our money. When that leadership starts to fade, you have to adapt. You can't just keep buying the same stocks that worked in July. Luna: That makes sense. So what's your actual playbook for the next few days? How do you trade this kind of tape? Lucas: I think the first thing is to watch the open carefully. If we gap down and then try to rally, I want to see if that rally holds above the prior day's high. If it doesn't, I'm going to be looking for short entries into strength. If it does hold, then maybe we're just in a dip-buying scenario. Luna: So you're really letting the price action tell you what to do rather than predicting. Lucas: Absolutely. The VIX and the VVIX are just inputs. They tell me to be more cautious, but they don't tell me exactly which way to trade. I need the price action to confirm. And I think that's a lesson that a lot of traders forget — the volatility indexes are a risk gauge, not a crystal ball. Luna: Yeah, I've been guilty of that myself. Sometimes I see the VIX spike and I immediately think 'sell everything,' but that's not how it works. Lucas: Right. And that's why I like to look at the VVIX as well, because it gives you a sense of whether the VIX move is likely to continue or whether it's just noise. If the VVIX is also climbing, that's more concerning. If it's flat, maybe the VIX spike is just a one-off. Luna: So you're really building a framework for how to interpret these signals, and that's something our listeners can apply to their own trading. Lucas: That reminds me — and I know we've said this before, but it bears repeating because we're able to keep this podcast free and ad-free thanks to the listeners who support us. If you're getting value from these conversations, whether it's a new way to think about the VIX or a better understanding of market structure, consider buying us a coffee. It's buy me a coffee dot com slash fexingo. It's a small gesture, but it really helps us keep doing this. And it's not required — we're just grateful for the support from those who can. Luna: Yeah, and we genuinely appreciate every bit of that. It keeps the lights on, so to speak, and lets us keep digging into the topics you want to hear. No pressure, just if it feels right. Lucas: Exactly. So back to the tape. One thing I want to emphasize is that even with the VIX climbing, we're not seeing panic. The VIX is still below 20, and the VVIX is around 92, which isn't extreme. So this is more of a normal uptick in volatility, not a crisis. Luna: So maybe it's just the market taking a breather after a strong run, and the volatility is just a natural correction. Lucas: Right. And that's why I'm not changing my entire strategy. I'm just tweaking my risk parameters. I'm taking smaller positions, I'm using wider stops, and I'm being more selective about the setups I take. I'm not looking for the big home run; I'm looking for singles and doubles. Luna: That's a good mindset. And with bond yields rising, are there any sectors you're particularly avoiding or favoring right now? Lucas: I'm going to be careful with the high-flying tech names, especially those without earnings support. Those are the ones that can get hit hard when yields move up. On the flip side, I'm keeping an eye on energy and financials, which tend to do better in a rising rate environment. But again, I'm waiting for the price action to confirm before I act. Luna: And what about the after-hours moves? We saw Toll Brothers and Keysight moving after hours. Does that give you any clues for tomorrow? Lucas: Earnings reactions are always informative, but I don't read too much into one or two names. What I do watch is the overall tone of the after-hours tape. If I see a lot of green after a day like today, that might suggest the selling pressure is easing. If it's red across the board, then we could see a weaker open tomorrow. Luna: So it's more about the breadth of the after-hours move than the specific names. Lucas: Exactly. And I think that's a good note to end on. As we head into the next few sessions, keep your eyes on the VIX and the VVIX, watch the Russell relative to the S&P, and don't be afraid to trade smaller if the volatility makes you uncomfortable. The market will still be there tomorrow. Luna: And remember, it's not about being right every time, it's about managing your risk so you can keep trading another day. Lucas: Well said. That's all for today. Thanks for joining us, and we'll talk to you next time.