Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why The VIX Is Lying To You Right Now
Transcript
- Lucas: Look at the VIX right now. It’s up five and a half percent in just the last five days, sitting at eighteen point twenty seven. On paper, that looks like a red flag. But if you look at the S&P 500, it’s down only zero point four percent, and the Dow is barely moving. So we have a volatility index screaming panic while the actual market is basically standing still. Luna: Exactly. And the NASDAQ is down a bit more at zero point seven percent, but that’s tech noise, not systemic risk. Why does the VIX care so much about nothing? Lucas: Because the VIX doesn’t measure what happened yesterday. It measures what traders think might happen tomorrow, specifically over the next thirty days. It’s derived from the prices of S&P 500 options. When those option prices go up, it means people are paying more for insurance against a crash, even if they don’t actually expect one. It’s a forward-looking sentiment gauge, not a backward-looking performance metric. Luna: So it’s essentially measuring the cost of fear, not the probability of ruin? That feels like a crucial distinction for anyone listening who might be checking their apps and getting jittery. Lucas: Precisely. Think about where we are on October 26, 2026. We’ve had a steady rally. Real GDP growth is holding at two point two percent annualized. The ten-year Treasury yield has actually come down from five point one three to four point nine six. This isn’t a crisis environment. This is a mature market cycle. Yet, the VIX is spiking. Luna: I wonder if it’s just seasonal flows or some large institutional hedge adjusting positions. Does the volume support a genuine shift in sentiment? Lucas: That’s the thing. Volume hasn’t exploded. In a real panic, you see volume spikes across the board. Here, the moves are quiet. The RUT, which tracks small caps, is actually up zero point eight percent. Small businesses aren’t selling off. If the VIX were reflecting true distress, small caps would be getting crushed along with the giants. Luna: Right. Small caps are leading slightly. That suggests liquidity is fine. So why the volatility squeeze? Lucas: Let’s talk about how options work. When you buy a put option, you’re paying a premium for the right to sell a stock at a certain price. As expiration gets closer, that time value decays. But sometimes, uncertainty creeps in. Maybe there’s a Fed speech, or some ambiguous economic data, and traders just pad their hedges. They pay extra for protection because they can’t predict the next week perfectly. That extra payment drives the VIX up, even if the stocks themselves don’t move. Luna: It’s like buying rain gear because the forecast says maybe forty percent chance of showers, even though it’s sunny outside. You’re paying for the possibility, not the current weather. Lucas: That’s a perfect analogy. And here is the danger for retail investors: they see the VIX spike, they assume the market is breaking, and they start selling. Or worse, they try to trade the volatility itself. But trading the VIX is incredibly complex. It’s not a stock. It’s a derivative of derivatives. Most people shouldn’t be touching it unless they know exactly what they’re doing. Luna: I agree. I see a lot of tweets from finance Twitter calling for a correction based solely on the VIX crossing nineteen or twenty. It’s lazy analysis. Lucas: It is lazy. Because historically, the VIX spends a lot of time between twelve and fifteen. When it spikes above eighteen, it usually means something specific is happening. Either earnings are uncertain, or geopolitical headlines are noisy. But today, neither is really the case. Goldman Sachs and JPMorgan are dominating AI stocks, sure, but that’s growth, not fear. Netflix and Dell are moving, but those are idiosyncratic company moves. Luna: So the headline makers are just making noise. The underlying machinery is stable. How do we explain this to someone who sees the red arrow on their portfolio app and wants to pull everything out? Lucas: You tell them to look at the bond market. The ten-year yield is falling. That’s good. It means borrowing costs are stabilizing. If the VIX was spiking due to inflation fears or recession risk, yields would be skyrocketing as investors flee bonds. Instead, yields are dropping. That tells us the macro environment is calm. The volatility is just... friction. Luna: Friction is a great word. It’s the static between stations. Doesn’t mean the signal is gone. Lucas: Before we go deeper into the mechanics, I want to pause for a second. If our conversations about navigating these markets have helped you keep your head when others lose theirs, we’d appreciate your support. It keeps the research ad-free and allows us to dig into these details without rushing. You can find us at buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Every contribution helps us bring you this level of detail every single day. Luna: Yeah, and it lets us continue to challenge the hot takes instead of just repeating them. Thanks for listening and supporting the work. Lucas: Back to the VIX. Let’s look at the VVIX. That’s the volatility of the volatility. It’s up five and a half percent as well, sitting at one hundred two point forty eight. This confirms that traders are expecting more erratic swings in the near term. But again, erratic doesn’t mean downward. It just means choppy. Luna: Choppy markets are annoying for active traders, but for long-term holders, they’re often just background noise. Does the VIX ever give accurate warnings? Lucas: It does, but rarely. The VIX tends to lag. By the time it hits twenty-five or thirty, the market has usually already crashed. At eighteen, it’s just saying, 'Hey, things might get a little bumpy.' It’s a warning light on the dashboard, not the engine fire. And right now, the engine is running smooth. Luna: So ignoring it is the rational choice? Or at least, not panicking over it. Lucas: Ignoring it completely is risky, because you should always be aware of the cost of insurance. But reacting to it by selling equity is irrational. You’re selling low because the price of protecting yourself went up. That’s backwards. If you need protection, buy the puts. Don’t sell the stocks. Luna: That’s a key insight. Selling stocks to raise cash when volatility rises is often selling at a temporary discount. The fundamental value of the companies hasn’t changed. Lucas: Exactly. Apple, Microsoft, NVIDIA—these companies are still generating cash. Their earnings per share expectations haven’t been slashed. The P/E ratios are still reasonable relative to growth. The only thing that changed is the mood of the room. And moods change daily. Luna: It reminds me of the early part of the year when everyone was worried about rates. The VIX jumped then too, but the market kept climbing. Context is everything. Lucas: Right. We’re in a late 2026 environment where growth is moderate, rates are high but stabilizing, and corporate profits are solid. The VIX spike is likely driven by some technical factor in the options chain. Maybe a large block trade of puts for hedging purposes. Or maybe it’s just end of quarter positioning. Luna: end of quarter rebalancing can definitely cause these kinds of artificial spikes. Funds adjust their exposures, pushing around options contracts. Lucas: That makes sense. If it’s just rebalancing, it will fade. The VIX is mean-reverting. It rarely stays elevated for long unless there’s a structural break in the economy. And we don’t have a structural break. We have a solid two point two percent GDP growth. Luna: So my takeaway is: watch the VIX, but don’t let it watch you. It’s a symptom, not the disease. Lucas: Spot on. Use it to gauge sentiment, not to make decisions. If the VIX is high, and your fundamentals are strong, hold tight. If you’re nervous, diversify. But don’t liquidate your life savings because an index called the Volatility Index went up five percent. Luna: And remember, the S&P 500 is still at seven thousand six hundred eighty-five. That’s higher than it was a month ago. The trend is up. The VIX is just asking for a toll on the way up. Lucas: Love that. The toll is the cost of staying in the game. Pay it if you want, but don’t abandon the car. Next week, we’ll look at how small caps are continuing to outperform, which is another sign that the market breadth is healthy despite the noise. Luna: Sounds like a plan. Stay calm, check the fundamentals, and ignore the static.