Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the VVIX Matters More Than the VIX Right Now
Transcript
- Lucas: So the VIX is down to about fifteen point six nine, a two percent drop over the last five days. The tape feels calm. But underneath, the VVIX — the volatility of that volatility — is still sitting at eighty six point five six. That's a level that historically says the market is not as comfortable as the VIX would have you believe. Luna: So the market's version of a calm ocean, but the currents below are still churning. Why does that gap matter for the average investor? Lucas: Because the VVIX tells you what options market makers are actually pricing for the risk of a sudden move. When the VIX is low but the VVIX stays elevated, it's a sign that the market is prepared for a spike in volatility, even if it hasn't happened yet. Think of it like a weather forecast that says sunny, but the barometer is dropping fast. Luna: Right, and that barometer reading is something we've been talking about in recent episodes — the VVIX as a leading indicator. But today, let's get into the mechanics. What's actually driving that high VVIX? Lucas: A big part is the options market itself. When market makers sell options, they're taking on the risk of a big move. To hedge that risk, they buy and sell the underlying index or other options, and that activity feeds back into the VVIX. If they're nervous about a tail event — say, a geopolitical shock or a sudden Fed surprise — they demand more premium for that insurance, even if the VIX is low. Luna: So the VVIX is almost like the market's own anxiety about its anxiety. Lucas: Exactly. And right now, with the S&P 500 hitting new highs around seven thousand six hundred sixty-six, and the Dow at fifty-three thousand four hundred twenty-five, you'd think all is well. But the VVIX is still above its long-term average, which historically has been around eighty. So we're in a zone where the market is pricing in more uncertainty than the surface suggests. Luna: And we saw that in the recent flash moves in some tech names, right? I mean, small-cap indices are basically flat, but the Nasdaq is down slightly over the past five days. That's not exactly a broad sell-off, but it shows some nervousness in the growth trade. Lucas: Precisely. And that's where the VVIX becomes a practical tool. If you're thinking about buying the dip, or adding to a position, the VVIX can help you gauge whether the market's calm is genuine or just a calm before a storm. A high VVIX suggests that even if the VIX is low, the options market is bracing for a move. Luna: So what's a listener supposed to do with that? Should they just avoid the market entirely? Lucas: No, not at all. But it does argue for being selective and maybe holding a bit more cash or having some downside protection in place. For example, if you're already thinking about trimming a position that's had a huge run, a high VVIX might be a reason to do it sooner rather than later. Or if you're looking to add, you might want to wait for the VVIX to come down, because that often coincides with a more sustainable rally. Luna: That makes sense. You're essentially using the options market's own fear gauge to time your entries and exits. But isn't that a bit like trying to time the market, which we're always warned against? Lucas: It's less about timing the market and more about respecting the market's own risk assessment. You don't have to trade on it, but you can use it to adjust your risk appetite. If the VVIX is high, maybe you diversify a bit more, or you focus on quality companies with strong balance sheets instead of speculative growth stories. Luna: And that's a really practical piece of advice. Now, I know we've touched on this in past episodes, but can you walk us through a specific example of how the VVIX actually moves? Lucas: Sure. Take the recent sell-off in late July. The VIX spiked to over twenty, but the VVIX had been climbing for weeks before that. It was like the canary in the coal mine. By the time the VIX jumped, the VVIX was already pricing in a lot of uncertainty. And that's typical — the VVIX tends to lead the VIX, not the other way around. Luna: So if the VVIX is leading, what's it showing now? We're at eighty-six, which is above average, but not extreme. How should we interpret that? Lucas: I'd say it's a yellow flag, not a red one. It's telling us that the market is aware of potential risks — like the Fed's next move, or the ongoing geopolitical tensions you see in the headlines, like that Huawei licensing deal with HP. That story adds a layer of uncertainty to tech supply chains. So the market is hedging a bit, but it's not in panic mode. The VVIX would need to be above a hundred or so to signal real distress. Luna: And what about the fact that the VIX itself has been dropping? Doesn't that suggest the market is getting more confident? Lucas: It does, and that's the paradox. The VIX is a measure of expected volatility over the next thirty days, based on S&P 500 options. When it drops, it means the options market is pricing in a calmer month ahead. But the VVIX is telling you that the market is less sure about that forecast. It's like the market saying, 'We think it'll be calm, but we're not willing to bet a lot on it.' Luna: So for a long-term investor, is there any reason to care about this short-term noise? Lucas: Actually, yes. Because even long-term investors can get caught off guard by short-term drawdowns. If you're planning to sell some stock in the next few months to fund a purchase, or if you're rebalancing, knowing that the VVIX is elevated might make you more cautious about doing it all at once. You might spread your sales over a few weeks or use limit orders to avoid the worst of a potential spike in volatility. Luna: That's a really practical tip. And I guess it ties back to what we've been saying about the stealth risks in this market — like the concentration in index funds we talked about in earlier episodes. The VVIX is another one of those quiet signals that most people overlook. Lucas: Exactly. And that's what this podcast is all about: helping you navigate the bear market and the bull market with your eyes open. So let's wrap up with a concrete takeaway. If you look at the tape right now, the VIX is low, but the VVIX is still elevated. For me, that's a signal to keep some powder dry and not get overconfident. Luna: And if listeners want to dig deeper into this, what should they look for? Lucas: I'd say watch the VVIX over the next few weeks. If it starts to break above ninety, that's a warning sign. If it drops below eighty, the market is getting more comfortable. It's a simple number, but it captures a lot of information about market anxiety. Luna: That's a great way to put it. And before we go, I want to mention something that's been on my mind. We get a lot of emails from listeners who say these episodes have helped them make smarter decisions with their money. And that's incredibly rewarding to hear. Lucas: Yeah, we do. And you know, this show is ad-free, and that's only possible because of the people who support us. If you've gotten something out of our conversations, even a couple of dollars a month genuinely makes a difference. You can find us at buy me a coffee dot com slash fexingo. It's a small thing, but it keeps these episodes going. Luna: And we don't say that lightly. Every little bit helps us keep doing the research and bringing you the insights that matter. So thanks for considering it. Lucas: Alright, back to the markets. So, to circle back — the VVIX is one of those indicators that rewards attention. It's not going to tell you the exact day of a crash, but it can tell you when the market is getting nervous. And right now, it's saying stay alert, stay nimble, and don't assume the calm will last forever. Luna: And with that, we'll leave you to watch the tape. Until next time, keep your head up and your hedges handy.