Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / When the VIX Drops but the VVIX Stays High
Transcript
- Lucas: So the VIX has been doing that thing again — falling to 14.43 as of this week, down over six percent in five days. And on the surface, that looks like the market is calm, right? But here's the thing: the VVIX, which measures the volatility of the VIX itself, is still sitting at 88.68. That's barely moved. Luna: So the market is calm, but the market's fear gauge is nervous? That's a weird combination. Lucas: Exactly. And it's one of those signals that gets overlooked because most people just watch the VIX. But the VVIX tells you how much traders are hedging against a move in the VIX itself. When it stays elevated while the VIX drops, it's like the security guard is relaxed, but the guy watching the security guard is sweating. Luna: So what does that actually mean for the market? Is it a warning sign? Lucas: Historically, when the VVIX stays high while the VIX falls, it suggests that traders are positioning for a sudden spike in volatility, even if they're not exactly sure when it's coming. It's a hedging signal. And right now, with the VIX at 14, we're in what many would call complacent territory, but the VVIX is saying, 'not so fast.' Luna: And we're also seeing this in the bond market. The 10-year Treasury is at 4.68, the 30-year at 5.24. Those are pretty elevated yields. Lucas: Right, and that's the other part of the puzzle. The yield curve is actually steepening again — the 10-year minus 2-year spread is about 48 basis points. That's up from where it was earlier this year. And a steepening curve can mean a few things, but in this environment, it's often about inflation expectations or term premium — investors demanding more compensation for holding longer-term debt. Luna: So you've got a market that's near highs — the S&P 500 is at 7,780, up a bit over five days — but the bond market is saying, 'we're not that confident in the long run.' Lucas: Exactly. And that's why the VVIX matters. If you're only looking at the VIX, you'd think everything is fine. But the VVIX is like the backstage pass to what options traders are actually doing. They're buying protection on volatility itself. That's not a signal you see when everyone is truly complacent. Luna: I remember in past episodes, we talked about how the VIX can be misleading — like when it drops during a selloff because traders are selling futures. But the VVIX adds another layer. How often do we see this kind of divergence? Lucas: It's not super rare, but it's notable when it happens at these levels. For example, in late 2018, the VIX was low, but the VVIX was elevated before a sharp correction in December. Same thing in early 2020 — though that was more of a sudden shock. The point is, when the VVIX is high, it means the market is paying up for optionality on vol. That's usually a sign that big players are nervous. Luna: So if the VVIX is high, should we be doing anything differently? Like, should we be hedging our portfolios? Lucas: Well, that's the million-dollar question. The VVIX isn't a timing signal — it's more of a 'pay attention' signal. It tells you that the cost of hedging is elevated, which means the market expects something. But it doesn't tell you when. So for the average investor, it's a reminder that the calm might not last. It's not a reason to panic, but it is a reason to make sure your portfolio is positioned for potential drawdowns. Luna: And what about buying the dip? We've talked about how that's harder than it looks. Does the VVIX change that calculus? Lucas: It does, actually. Buying the dip is easy when the VIX is spiking and you think it's a knee-jerk reaction. But when the VVIX is elevated, it suggests that the dip might not be a quick V-shaped recovery. It could be a grinding, uncertain decline where you're catching a falling knife. So maybe you want to be more patient, or use options to enter gradually rather than throwing all your cash in at once. Luna: That's a good point. And I've actually been reading about how some big investors are using options to express that kind of view. Like, they're buying puts on the VIX itself, which is a way to bet on volatility without having to time the market perfectly. Lucas: Right, and that's exactly what the VVIX is capturing. When you see the VVIX at 88, that's saying that options on the VIX are relatively expensive. People are paying up for that protection. And that's a collective statement about the future. Luna: So what's the takeaway for someone who's just listening and maybe feeling a little uneasy? How should they interpret this? Lucas: I'd say the takeaway is that the market is sending mixed signals. On one hand, you have the VIX low and stocks near record highs. On the other, you have the VVIX elevated, bond yields high, and real GDP growth slowing to 1.5 percent annualized. That's not a screaming bear market signal, but it is a caution flag. It's a time to be thoughtful about risk, not to be reckless. Luna: And maybe to actually look at the VVIX once in a while instead of just the VIX. Lucas: Absolutely. It's one of those indicators that's underappreciated. But if you're serious about understanding market dynamics, it's worth adding to your toolkit. And it's one of those things where a little bit of knowledge goes a long way. Luna: Hey, speaking of knowledge going a long way — if today's episode has given you something useful to think about, that's exactly the kind of thing that keeps us going. And the way to keep this show ad-free is through listener support. If you're in a position to, you can buy us a coffee at buy me a coffee dot com slash fexingo. Lucas: Yeah, it genuinely helps us keep doing this without sponsors. But back to the market — so if we're looking at this divergence, what's the one thing you'd tell a friend who's not a market junkie? Luna: I think I'd say: don't confuse a low VIX with safety. The VIX might be calm, but the VVIX is telling you that the market isn't fully at ease. It's like the calm before a storm — not that the storm is definitely coming, but you wouldn't be surprised if it did. Lucas: That's a great way to put it. And on that note, maybe the best approach is to keep an eye on the VVIX as a leading indicator. If it starts to fall while the VIX stays low, that could be a sign that the market is genuinely complacent. But right now, the fact that it's elevated suggests there's a real undercurrent of caution. Luna: So we'll be watching that. And for everyone out there, maybe it's a good time to review your own risk tolerance and make sure you're comfortable with the potential for a bumpy ride. Lucas: Exactly. That's the takeaway. Thanks for listening, everyone. We'll catch you next time.