Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the VVIX at 104 and VIX at 18 Signal a Divergence Risk
Transcript
- Lucas: So the VIX is at 18.77, up more than 9 percent over the past five days. The VVIX, which measures the volatility of the VIX itself, is at 104.87, up over 10 percent. And yet the S&P 500 has only fallen about 0.8 percent in that same window. Luna: That feels like a mismatch. The fear gauges are screaming, but the market is barely blinking. Lucas: Exactly. And that divergence is worth drilling into. Because normally, when the VIX jumps that much, you see the S&P off by 2 or 3 percent. Instead we're looking at a very orderly, almost gentle decline. So what's causing the spike? Luna: Is it just hedging flows? I mean, we saw big options activity earlier this week, especially in zero-day-to-expiry contracts. Lucas: That's part of it. But the VVIX at 104 tells a more specific story. The VVIX has to go above 100 for traders to really pay attention. Below 100, it's normal noise. Above 100, it suggests the options market is pricing in a nontrivial chance of a sudden jump in implied volatility. In other words, people are buying protection on their protection. Luna: Right, so it's not just that the VIX is elevated. It's that traders expect the VIX itself to become more volatile. That's a step up in tail-risk consciousness. Lucas: Exactly. And here's the interesting part — the Russell 2000 is actually up 0.3 percent over the same five days. Small caps aren't participating in the unease at all. So the anxiety is concentrated in large-cap index options. Luna: That could be a sector rotation story. Maybe money is quietly moving out of mega-cap tech and into value-oriented small caps, and the options market is scrambling to hedge that shift. Lucas: I think that's plausible. We've had two straight weeks of small-cap outperformance relative to the S&P. And the yield curve has steepened again — the ten-year minus two-year spread hit 41 basis points a few days ago before settling back to 37. That steepening historically favors smaller companies that borrow at floating rates and benefit from a steeper curve. Luna: So the VVIX spike might be more about hedge funds adjusting convexity positions than about a fundamental fear of recession. Lucas: Right. And this is where the VVIX as a regime signal comes in. When the VVIX rises above 100 while the VIX is still in the teens, you're essentially seeing a premium on tail risk. The market is saying, 'We don't think a crash is imminent, but the cost of insuring against one just went up because someone out there is buying a lot of out-of-the-money puts.' Luna: And that someone — could it be systematic strategies? Like, risk-parity funds deleveraging, or CTA trend followers covering short vol? Lucas: Both are possible. There's also the Dallas Fed President Logan's comments last week calling for modestly higher rates. That reintroduced some policy uncertainty. The futures market now prices a higher probability of a rate hike in September than it did a month ago. And when the Fed path becomes less certain, option dealers widen their bid-ask spreads and the VVIX tends to pop. Luna: So it's a technical event driven by positioning and policy noise, not a fundamental shift. But can it become self-fulfilling? If the VVIX stays above 100 for another week, might that start to affect actual portfolio decisions? Lucas: It can. If the elevated VVIX persists, you'll see more volatility-targeting funds reduce their equity exposure. Not because they see a recession, but because their risk models say 'volatility is rising, cut leverage.' That can create a feedback loop. But so far, the equity market hasn't flinched. The S&P is only down 0.8 percent. Luna: And the Nasdaq is down 1.4 percent over five days. So tech is taking the brunt. That aligns with the rotation story. Lucas: It does. And it's worth noting that the Nasdaq's decline is not a panic — it's a controlled pullback. The VIX at 18.77 is elevated relative to the realized volatility of the past month, which has been around 12. So there's a premium built in. The question is: does that premium get realized, or does it decay? Luna: What would cause it to decay? If the Fed doesn't hike, or if economic data comes in soft and reinforces the soft-landing narrative. Lucas: Right. Next week we get the advance Q2 GDP print. The Atlanta Fed's GDPNow is tracking around 2.1 percent annualized. That's not recession territory. If that holds, the VIX premium could fade. But if the data surprises to the downside, then the VVIX spike starts to look prescient. Luna: So we're watching the VVIX as a leading indicator — it's not just a curiosity. Lucas: Exactly. The VVIX above 100 is a flag. It doesn't tell you exactly what will happen, but it tells you that the options market is paying up for tail protection. And when that happens, you should at least ask yourself: is my portfolio prepared for a volatility event? It doesn't mean you should sell everything. But it might mean checking your hedges, maybe adding a small put spread. Luna: If today was actually useful to you, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Lucas: Yeah, we keep it free because people like you chip in. It really helps. Luna: And it lets us dig into these niche signals without a sponsor telling us to simplify. So thanks if you do. Lucas: Back to the VVIX — one more thing: the VVIX term structure is also worth watching. Currently the front-month VVIX futures are above the back-month, which is normal in a stress event. But if that backwardation persists, it suggests the hedging demand isn't going away. Luna: So it's a canary, not the mine collapse itself. Lucas: Exactly. Keep an eye on it, but don't panic. The real test will be how the S&P handles the next 1 percent down day. If the VIX jumps to 22 or 23, then we're in a different conversation. But if it stays contained, then this VVIX spike will fade into another footnote. Luna: And the Russell 2000's resilience might be the bigger story. Lucas: Could be. We'll have a lot to talk about next week.