Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why the VIX Is Quiet While the S&P Hits New Highs
Transcript
- Lucas: So the S&P hit another record on Friday, closing at 7,587, and the Nasdaq's up 4% on the week, but the VIX is sitting down near thirteen. That's a strikingly calm reading for a market making new highs. Luna: Yeah, usually you'd expect at least some jitters as we push into uncharted territory. I mean, we've got geopolitical stuff with the Iran situation, diesel prices spiking in California – you'd think that'd show up somewhere. Lucas: Exactly, and that's the puzzle we want to dig into today. Why is the market so calm on the surface, and what does that low VIX actually tell us about what's underneath? Before we get into that, though, I want to take a quick moment to mention something that keeps this show going. Luna: Yeah, absolutely. We don't run ads on these episodes – that's a deliberate choice, and it's only possible because of listeners who support the show directly. Lucas: Right. So if our conversations have helped you think about a decision differently, or just made you a more informed investor, and you want to keep that going, the link is buy me a coffee dot com slash fexingo. It's a simple way to say thanks and keep us ad-free. Luna: Yeah, no pressure, but every bit genuinely helps. Now, back to the VIX – why is it so quiet? Lucas: Well, first let's talk about what the VIX actually measures. It's not a crystal ball – it's the market's expectation of how much the S&P 500 will move over the next thirty days, derived from option prices. Right now, that expectation is around thirteen percent annualized, which is in the bottom quartile of its historical range. Luna: So essentially, options traders are pricing in a very smooth ride ahead. Lucas: Exactly. And one reason is that the Fed has been steady – the effective fed funds rate has been flat at 3.63 percent since June. No hikes, no cuts, just stability, and that removes a whole category of uncertainty that usually drives volatility. Luna: But it's not just the Fed. I've been noticing a lot of call selling lately – investors betting that the market won't crash, and in a way, that selling itself suppresses the VIX. Lucas: That's a great point. When you have a bull market that's been running this long, more and more investors get comfortable selling options to generate income. That puts downward pressure on implied volatility, creating this feedback loop where calm breeds more calm. Luna: So is that a sign of complacency, or is it just rational adaptation to a market that hasn't really had a 10 percent correction in a while? Lucas: I'd say it's a bit of both. Look, the market has been remarkably resilient. The S&P is up over 40 percent from its 2022 low, and the Nasdaq has more than doubled. But that doesn't mean the risk is gone – it's just not being priced in right now. Luna: And there's a risk that when volatility does spike, it spikes hard, because everyone's positioned for calm. Lucas: Right. Low VIX doesn't mean the market is safe – it means the market is pricing in low risk. And if something unexpected happens, the adjustment can be violent. We saw that in 2018 with the 'Volmageddon' event, where short volatility products blew up in a matter of days. Luna: But isn't there also a case that low volatility is justified here? I mean, we have strong earnings, GDP is still growing, even if it slowed to 1.5 percent annualized in Q2 – that's not a recession. Lucas: No, it's not. The economy is still expanding, and corporate margins have held up better than many feared. But the key is that the market has run ahead of the fundamentals. The S&P is trading at over 22 times forward earnings, and that's on the higher end of historical norms. Luna: So we're paying a premium for a smooth ride, and if the ride gets bumpy, that premium could unwind quickly. Lucas: Exactly. And that's where the concentration risk comes in. The Nasdaq's 4 percent weekly gain was driven by a handful of mega-cap tech names – if those stumble, the whole index feels it. We saw that with Shopify's 9.4 percent drop this week, and that's just one stock. Luna: Yeah, Shopify isn't even in the top ten, but its move was a reminder that even high-flyers can reverse hard. Lucas: And that's why we need to be careful not to confuse a low VIX with a low-risk environment. The VIX is a measure of expected volatility, not a measure of danger. When the VIX is this low, it's often a contrarian signal – not a time to get more aggressive, but a time to check your risk. Luna: So what would you tell a listener who's thinking about adding to positions right now? Lucas: I'd say, look at your time horizon. If you're investing for decades, a low VIX doesn't change your plan – stay diversified, keep contributing. But if you're trading shorter term, be aware that you're paying a premium for options and that a spike could come without much warning. Luna: And maybe that's the real takeaway – the VIX is a tool, not a crystal ball. Lucas: It's a tool for measuring sentiment, and right now sentiment is very calm. Whether that calm is justified or just a prelude to a storm – only time will tell. But understanding what's behind the number is what matters for making smart decisions. Luna: Yeah, and we'll be watching the VIX closely over the next few weeks, especially with the jobs report coming out on Friday. If that comes in hotter than expected, we could see a sudden jump. Lucas: Absolutely. Kalshi traders are already betting it'll be cooler than economists expect, but those prediction markets can be wrong too. Either way, a surprise on the jobs number is exactly the kind of thing that could break the calm. So keep an eye on that. Luna: Well, I think we've given our listeners a lot to think about. Thanks for joining us on Bull Market Conversations, and we'll catch you next time.