Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / The Nasdaq Is Down 5 Percent in a Week Here's What That Usually Means Next
Transcript
- Lucas: So the Nasdaq just had its worst week in about a year. Down 5.1 percent in five trading days through yesterday — June 7. The S&P 500 dropped 2.8 percent. Even the Russell 2000, which had been holding up better, lost 2.5 percent. Luna: And the VIX hit 21.5. That's up 34 percent in a week. It's not panic territory, but it's definitely a regime shift from the low-teens VIX we saw a month ago. Lucas: Right. And I think the instinct — especially after years where every dip was bought — is to ask: is this the start of something bigger or just another pothole? So I spent some time looking at what actually happens after five-day drops of this magnitude in the Nasdaq. Luna: Let me guess — the historical data cuts both ways? Lucas: It does, but there's a pattern. Since 1990, there have been 47 instances where the Nasdaq lost 5 percent or more in a five-day window. And the median return six months later is positive — about 5.8 percent. But the distribution is skewed. About a third of those episodes led to further losses over the next six months, and some were ugly. Luna: A third is not nothing. And I imagine the context matters a lot — what the macro backdrop looks like. Lucas: Exactly. And the context right now is the May jobs report that came out on Friday. Hot. Non-farm payrolls came in well above expectations, and that pushed the timeline for Fed rate cuts further out. Chair Warsh is not cutting anytime soon if the labor market stays this tight. Luna: So the market is repricing the rate path higher, and tech — which is sensitive to discount rates — takes the biggest hit. That makes sense. But I'd also point to the VIX term structure. The VIX is at 21.5, but the VVIX — the volatility of volatility — is at 102. That's elevated, but not screaming panic. Luna: We've talked about the VVIX before. When it's above 120, that's usually when options market makers start to really hedge aggressively. At 102, it's elevated but not crisis level. Lucas: Good point. And I think that's actually consistent with a correction that's about repricing rather than a fundamental break. One thing I noticed: the sectors that led the selloff — semiconductors, software, consumer tech — those are the same sectors that led the rally. So it's a rotation out of the crowded trade, not a broad-based liquidation. Luna: Look, if our money conversations have helped you think about a decision differently — maybe it's how you're positioning in this drawdown, or how you're thinking about risk — and you want to help keep this show ad-free and independent, you can buy us a coffee. The link is buy me a coffee dot com slash fexingo. No pressure, just if the show has added value for you. Lucas: We really appreciate that. And it genuinely helps us keep doing the deep dives without having to chase sponsors. So thank you. Lucas: So back to the data. Another thing I looked at was what happens to the S&P 500 in the same window. Historically, when the Nasdaq drops 5 percent in a week, the S&P tends to follow, but with a lag. The median S&P drawdown over the next month is about 2 percent more. Luna: So we might not be done yet. The S&P only lost 2.8 percent this week, so by that measure, there could be another leg down. Lucas: Right. But the Russell held up better — down only 2.5 percent. That's actually a hopeful sign. Small caps have been beaten down for two years. If they stop falling, it suggests the selling is concentrated in the high-multiple names, not the whole market. Luna: Which is exactly what you want to see in a healthy correction. The question is whether the rotation into value and small caps actually sticks this time. We've seen these rotations before that lasted two weeks and then tech snapped back. Lucas: The 10-year yield is at 4.47 percent. Down a couple basis points from last week, actually. So the bond market is not screaming recession. If this were a real panic, you'd see yields crashing. Instead, they're steady. Luna: The 10-year minus 2-year spread is still at 38 basis points. Positive. So no inverted yield curve screaming recession either. That's a big difference from 2023. Lucas: Absolutely. So the macro data doesn't support a recession call. But the market is pricing in higher for longer on rates. And that's a headwind for valuations, especially for companies that don't generate cash today. Luna: Which brings us to the question every investor is asking: should you buy this dip? Or wait? Lucas: I think the honest answer is: it depends on your time horizon. If you're a long-term investor, the historical data says that buying after a 5 percent Nasdaq weekly drop has worked out well about two-thirds of the time over the next six months. But if you're a trader, you have to watch the VIX and the VVIX for signs of exhaustion. Luna: And the VIX at 21.5 is not low enough to say the fear is fully priced in. Historically, VIX peaks during corrections are usually above 25. So we might not be at maximum fear yet. Lucas: That's a good rule of thumb. The other thing I'd flag is the sector dispersion. In this selloff, the worst-performing stocks are the ones that had the highest short interest and the highest options activity. That suggests a lot of forced selling from momentum traders, not fundamental sellers. Luna: So the dip could get deeper if the momentum unwind continues. But the fundamentals — earnings growth, GDP growth, employment — are still solid. Lucas: Real GDP growth just came in at 1.6 percent annualized for Q1 2026. That's up from 0.5 percent in the prior quarter. So the economy is accelerating, not slowing. That's a big cushion. Luna: So to summarize: the selloff is real, it's led by tech, it's driven by rate repricing, but the macro backdrop is still okay. The historical odds favor recovery, but the path might be bumpy. Lucas: Exactly. And I'd add one more historical tidbit. When the Nasdaq drops 5 percent in a week and the VIX is below 25, the median return one year later is about 12 percent. When the VIX is above 25, the median is closer to 6 percent. So the fact that we're at 21.5, not 30, is actually a mildly bullish signal for the longer term. Luna: That's the kind of data point that keeps me from hitting the sell button. But it also reminds me not to go all-in on a single day either. Lucas: Right. Dollar-cost averaging into weakness has a better track record than trying to catch the exact bottom. And if the VIX spikes above 25, that might be a better entry point. Luna: So the playbook is: stay invested, but be ready to add if fear escalates. And don't panic out of your positions just because the Nasdaq had a bad week. Lucas: That's it. And we'll keep watching the VVIX, the yield curve, and the sector rotation for signs that this correction is running its course. Luna: Good episode. I feel a little more grounded after looking at the numbers. Lucas: Me too. That's the whole point. Thanks for listening.