Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How to Tell If a Dip Is Really Worth Buying
Transcript
- Lucas: So the S&P 500 is sitting at 7,717, basically a stone's throw from its record, and the VIX has collapsed to 14.6—down almost eight percent over the last five days. And I keep seeing the same refrain on my timeline: 'dip bought, thank you, next.' But look, there's a detail in today's data that makes me want to pump the brakes on that reflex. Luna: Let me guess—it's the VVIX again. You mentioned it last week and I've been seeing it everywhere since. Lucas: Exactly. The VIX is the market's expectation of near-term volatility, but the VVIX is the volatility of that expectation—think of it as the market's confidence in its own fear gauge. And while the VIX has dropped almost eight percent over five days, the VVIX is only down about one point seven percent, to 87. That gap is telling you something: traders are calm, but not certain they should be calm. Luna: So it's like the market is saying, 'We're not scared,' but the thing that measures how scared we are about being scared is still kind of twitchy. Lucas: That's a perfect way to put it. And that's the setup for today's question: how do you tell if a dip is actually worth buying? Because we've had a two-year bull run where every pullback got bought within weeks. But now, with real GDP growth cooling to one point five percent annualized, the yield curve still steep-ish, and the Fed's September decision literally a coin flip, the next dip might not behave like the last few. Luna: Yeah, I think a lot of investors are trained to buy any five percent drop without asking why it's dropping. So what should we actually check before we deploy cash? Lucas: Let's start with the why. There are two kinds of dips: the kind driven by sentiment and the kind driven by fundamentals. Sentiment-driven dips—like a sudden spike in the VIX because of a geopolitical headline or a bad CPI print—tend to be bought quickly because the underlying earnings are still intact. Fundamental dips, where you see earnings estimates getting cut across the board, are a different animal. You need to ask: are analysts revising numbers down, or are they holding steady? Luna: And right now, with Q2 earnings season mostly done, what are the revisions looking like? Lucas: That's the thing—we don't have a broad wave of cuts yet, but the forward guidance has gotten noticeably cautious. Companies are citing input costs, currency, and the fact that the Fed hasn't actually cut rates. The two-year Treasury is at four point one nine percent, which is still restrictive for a lot of businesses. So even if estimates haven't fallen off a cliff, the tone has shifted. Luna: So how do we tell if a dip is 'sentiment' or 'fundamental' in real time? Can we look at credit spreads? Lucas: Credit spreads are a great tell. If high-yield spreads start blowing out while stocks dip, that's a sign that credit markets are repricing default risk—that's fundamental. If spreads stay stable and it's just equities getting wobbly, that's more sentiment. Right now, spreads are still reasonably tight, which would argue that the market isn't pricing a deep fundamental break. But the VVIX behavior tells you that conviction is thin. Luna: So the classic 'buy the dip' advice might be due for a refresh. What's the practical framework you'd give someone today? Lucas: I'd say there are three filters. First, check the reason: is it a macro scare or a micro earnings miss? If the dip is broad and tied to macro, you have to ask whether the macro is actually deteriorating. Second, check the market structure: is the VIX just spiking, or is the VVIX also exploding? If the VVIX is also exploding, that means options dealers are hedging in a way that could exacerbate the move, so don't be a hero. Third, and maybe most important, know your own time horizon. Luna: And the time horizon thing—that's where I think a lot of people get burned. Because 'buy the dip' is fine if you're investing for ten years, but if you're going to need that money in six months, it's not a dip, it's a gamble. Lucas: Right. If your horizon is short, you don't have the luxury of waiting out a twenty percent drawdown. And that's the thing about the data we're seeing today—the VIX at 14.6 feels complacent, but the VVIX at 87 is still above its historical average. That mismatch is a yellow flag. Luna: So would you say the current market is more 'eye of the storm' or 'all clear'? Lucas: I'd say it's the eye of the storm, but not because I think a hurricane is definitely coming. It's because we have a Fed decision that's genuinely a coin flip—the futures are pricing roughly a fifty-fifty chance of a hike or a hold in September. And that kind of uncertainty is exactly what the VVIX is picking up. The market doesn't know what the Fed will do, and that uncertainty is priced into the volatility of volatility. Luna: And with the 10-year at 4.66 and the 30-year at 5.18, we've got longer-term rates creeping up. That's a risk for equity valuations, especially for growth stocks that trade on future cash flows. Lucas: Exactly. Higher long-term rates are a discount rate on future earnings, so they compress multiples. That's why you've seen the Russell 2000—which is down zero point five percent over five days—underperform the mega-cap S&P 500, which is up. Smaller companies are more rate-sensitive because they rely more on borrowing and they have less pricing power. So if you're buying a dip, and the dip is in small caps, you need to be extra careful about the rate environment. Luna: So maybe the smart play isn't 'buy the dip' but 'buy the dip selectively'—like, buy the quality names that have strong balance sheets and pricing power, and avoid the leveraged, high-duration stuff. Lucas: That's a really good way to frame it. And it's not just about avoiding losses; it's about maximizing the risk-adjusted return. If you buy a dip in a quality company with a strong balance sheet, you have a margin of safety if the market stays volatile. If you buy a dip in a speculative stock with no earnings, you're just hoping for a sentiment turn, and that's not an investment strategy. Luna: Let's talk about those quality names. What are some characteristics you'd look for? I'm thinking companies with high return on invested capital, low debt, and maybe a history of raising dividends through downturns. Lucas: Exactly. Return on invested capital is a great filter—you want companies that can generate high returns without needing to constantly raise debt. And you want to see that return on invested capital is stable or improving, not deteriorating. Also, look at the balance sheet: cash flow from operations should comfortably cover interest expenses. And if they have a dividend, check the payout ratio—anything above eighty percent is a red flag in a downturn. Luna: So, practically, how do we find those names? Is it just screening on metrics, or is there a more nuanced approach? Lucas: The metrics get you in the ballpark, but then you have to do the qualitative work. Ask: does this company have pricing power? Can they pass on higher input costs to customers without losing market share? Do they operate in a sector that's less cyclical? Think healthcare, utilities, even some tech—the kind of companies that sell software with recurring revenue, not just one-off hardware. And then you have to value them. A great company at a terrible price is still a bad investment. Luna: And that gets to the timing part. How do you know when the dip is 'enough'? Is there a rule of thumb or is it more of a gut call? Lucas: I think there are a couple of levels. Historically, a five to ten percent pullback is just a routine correction, and that often gets bought. A twenty percent bear market is a different animal, and that requires a different playbook—you can't just buy the first twenty percent drop because it might go to thirty. But there's no magic number. Instead, I'd look at the market's internals: are we seeing breadth improve? Is the VIX starting to roll over? Are credit spreads widening or tightening? You want to buy when the panic is peaking, not when it's just starting. Luna: So maybe the better advice is not 'buy the dip' but 'buy the panic'—and only when you've done your homework on the fundamentals. Lucas: That's a solid maxim. And it's not new, but it's worth repeating because the reflex is so strong. We've been conditioned by the last few years where every dip was a gift. But the market doesn't owe us that. Some dips are traps, and the VVIX is one of the tools that can help you distinguish between the two. Luna: Well, and honestly, even just having these mental filters helps. I know when I look at a dip now, I'm not just asking 'is this down enough?' I'm asking 'is this down for the right reasons?' Lucas: Right. And that's the kind of shift in thinking that can really pay off over time. Before we keep going, this is something that's worth a coffee to you—if today's conversation helped you think about your own investing decisions differently, then that's the link: buy me a coffee dot com slash fexingo. No pressure, just if it was worth it. Luna: Yeah, and it honestly helps keep us going. We love making this show, and listener support is what keeps it ad-free and independent. Lucas: So, back to the practical side. Let's say you've run your filters and you've found a quality company that's down twenty percent on a macro scare. How do you actually size the position? That's the other part of the discipline that often gets overlooked. Luna: That's a great point. Because even if you've found a great dip, if you go all in and it drops another ten percent, you're going to be emotionally wrecked and might bail at the bottom. Lucas: Exactly. So you size it based on your risk tolerance and your portfolio's overall construction. A common approach is to decide on a maximum allocation to any single stock, and then buy in thirds or halves. You leave dry powder to add if the stock goes lower. And you set a stop-loss or a rule for yourself: if the thesis breaks, you get out, regardless of the price. Luna: So it's not just about picking the right stock, it's about managing the position. And that's where I think a lot of retail investors get into trouble—they buy the dip but they don't have a plan for what happens if it keeps dipping. Lucas: Right. The plan is what separates investing from gambling. And the plan has to be written down before you buy, not after. Because once you're down ten percent, your judgment is clouded by emotion. So you decide in advance: I'm buying this because of these fundamentals, and if those fundamentals change, I'm out. That's the discipline. Luna: Let's talk about the macro backdrop for a second. We mentioned the Fed and the coin flip. How much should that factor into your dip-buying decision? Lucas: It's a key input, but it shouldn't be the only thing you look at. The Fed affects discount rates, but if you're buying a company with strong cash flows, the discount rate matters less than the durability of those cash flows. However, if the Fed is hiking into a slowing economy—which is what a coin flip implies—that's a risk to the broader market. So you might want to keep your equity allocation a bit lower until the uncertainty resolves. Luna: And with real GDP growth at only one point five percent, the economy is already slowing. If the Fed hikes, could that tip us into a recession? And then a dip becomes a bear market. Lucas: That's the risk. The market is priced for a soft landing, but the data is mixed. The yield curve is still positive—10-year at 4.66 versus 2-year at 4.19—so that's not predicting a recession right now, but it's not a robust signal either. The steepening we've seen has been driven by long-term rates rising, which is more about term premium and fiscal concerns than about growth optimism. So the signal is ambiguous. Luna: So what would you say to someone who has cash on the sidelines and is waiting for a real dip? Should they be patient or is there an opportunity cost to waiting? Lucas: That's the eternal question. Cash earns around four percent in a money market fund right now, so you're not getting killed by waiting. And with the VVIX elevated, the risk of a sharp drawdown is real. So I'd say patience is prudent. But if you're fully invested and you have a long time horizon, you don't need to try to time the market—you just stay the course and maybe rebalance into weakness. Luna: So the takeaway might be: don't chase the dip, but don't fear it either. Have a plan, know your filters, and be patient. Lucas: That's it. And the one thing I'd add is to keep an eye on the VVIX. If it starts to drop significantly—say, back to the low seventies—that would suggest the market is gaining confidence in its calm, and that's a green light for a more aggressive approach. But as long as it's hanging up at 87, I'd keep my dip-buying modest and selective. Luna: That's a concrete signal we can all watch. And it's a great example of how a somewhat obscure index can actually inform real decisions. Lucas: Yeah, the VVIX is one of those underappreciated tools. And I think we've given people a solid framework to think about their next move. The key is to be intentional, not reactive. Luna: And on that note, we'll leave it there. Thanks for listening, and we'll catch you next time.