Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the VIX at 16 Is a Trap for Dip Buyers
Transcript
- Lucas: So the VIX closed at 15.81 yesterday, which is the first time it's been below 16 since March. And the S&P 500 is sitting above 7,400, up almost 2 percent in the last five days. It feels like the market has decided the coast is clear. Luna: And a lot of retail investors are probably looking at that and thinking, great, volatility is low, I can buy the dip without worrying about a rug pull. Lucas: Exactly. But here's the thing—the VIX measures expected volatility over the next 30 days, and it's low. But the VVIX, which is the volatility of the VIX itself—essentially the price of hedging tail risk—is at 88.8. That's not elevated by historical standards, but it's not collapsing either. It's actually flat over the last week, while the VIX dropped 10 percent. Luna: So the volatility of volatility isn't coming down at the same pace. That's a divergence. Lucas: Right. And historically, when the VIX drops fast but the VVIX stays sticky, it often means the market is pricing in a low-probability but high-impact event. Options traders aren't fully convinced the calm is permanent. They're still paying up for out-of-the-money puts on the VIX itself. Luna: So the VIX at 16 might be a trap for dip buyers who look at headline vol and assume it's safe to lever up. Lucas: That's the thesis. And I want to put some numbers around it. The yield curve has been steepening—the spread between the 10-year and 2-year Treasury is now 35 basis points, up from 31 just two weeks ago. That's a meaningful move. A steepening curve is often associated with economic optimism, but it can also signal that the bond market expects the Fed to stay higher for longer, or that term premium is rising because of fiscal concerns. Luna: And a steepening curve in a low-volatility equity environment—that's a setup that's historically preceded some sharp selloffs, isn't it? Lucas: It has. If you look back at 2018, the VIX was below 12 in late January, the curve was flattening, then it inverted, and then February hit with the volmageddon spike. But the pattern I'm watching is more like 2007—curve steepening from an inverted state, VIX low, and then a slow buildup into a correction. Not a crash, but a grind lower that catches dip buyers who got complacent. Luna: So you're not predicting a crash. You're saying the risk/reward for buying dips right now is worse than the headline numbers suggest. Lucas: Precisely. When the VIX is at 16, the cost of hedging is cheap. But that cheapness itself is a signal. If everyone can buy protection cheaply, then the market is vulnerable to a gamma squeeze or a rapid unwind if something breaks. And the VVIX staying elevated tells me that sophisticated money is not fully pricing out that tail. Luna: Talk to me about the VVIX level. 88 is—where does that sit historically? Lucas: The long-term median VVIX is around 85, so 88 is slightly above average. But the VIX at 15.8 is well below its median of around 17.5. So the VIX is cheap relative to history, but the VVIX is essentially at its median. That's the divergence. If the VIX were truly signalling a structural calm, you'd expect the VVIX to be below 80. It's not. Luna: And that makes sense intuitively. If I'm a dip buyer, I want to buy when the VIX is high and the VVIX is also high, because that's panic. When the VIX is low but the VVIX is mid-range, it's like a market that's quiet but nervous. Lucas: That's a great way to put it. Quiet but nervous. And the data from the options market backs that up. The put to call ratio on the S&P 500 has actually risen over the past week even as the index hit new highs. That's unusual. More people are buying puts than calls in a rally. That suggests hedging, not speculation. Luna: So the smart money is hedging. And the retail dip buyers are maybe not. Lucas: That's the risk. And I'm not saying don't buy equities. But if you're going to buy the dip here, you should probably pair it with some protection. A VIX call spread, or even just buying a put on an index ETF, is cheap right now. The VIX at 16 means you can buy a one-month 20-strike VIX call for about 50 cents. That's a lottery ticket, sure, but it's a cheap hedge. Luna: And if the VIX stays low, you lose that premium. But it's insurance. And if the VIX spikes, it pays off massively. Lucas: Exactly. And the VVIX at 88 tells me that the options market thinks a spike is more likely than the VIX level alone implies. It's like the VIX is saying 'I'm calm,' but the VVIX is whispering 'but I could get uncalm fast.' Luna: That's a useful framework. Let me ask—does the current economic data support the calm or the nervousness? Lucas: It's mixed. Real GDP growth annualised came in at 2.1 percent for the first quarter, up from 0.5 percent in the previous quarter. That's solid. But the 10-year yield at 4.48 percent and the 30-year at 4.97—those are levels that historically have been associated with tighter financial conditions. The economy is growing, but rates are not low. That's a different environment than 2023, when rates were falling and the VIX was low. Luna: And if the curve keeps steepening, that could put pressure on the Fed to stay hawkish, which would eventually hit risk assets. Lucas: Right. So my takeaway for listeners is this: don't look at the VIX at 16 and assume it's 2017 all over again. That was a period of structural low vol driven by central bank liquidity and a flat curve. Today we have quantitative tightening still running, a steepening curve, and a VVIX that's not confirming the calm. If you're a dip buyer, be selective. Maybe buy sectors that benefit from steepening—financials, for example—and avoid the high-beta tech names that have led the rally. Luna: And if you're not a trader, just a long-term investor, does any of this matter? Lucas: It matters for your entry point. If you're dollar-cost averaging, fine. But if you have a lump sum to deploy, waiting for a VIX spike above 20 might give you a better entry. The VIX at 16 is not a bad time to buy, but it's not a great time either. The risk of a 5-10 percent drawdown in the next three months is higher than the VIX suggests. Luna: And that's exactly the kind of insight that this show tries to bring—looking beyond the headline number to what the structure is saying. Lucas: Absolutely. And speaking of that, if you find value in these conversations, if they help you think about markets more clearly, you can support the show at buy me a coffee dot com slash fexingo. It's a simple way to keep this ad-free and independent. No pressure, but if you've ever gotten something useful from an episode, that link is there. Luna: Yeah, it really helps. And we appreciate every single contribution. Now, back to the VVIX—one more thing I want to touch on. You mentioned the VVIX is sticky. Are there any specific levels to watch? Lucas: If the VVIX breaks above 95 while the VIX stays below 17, that would be a classic warning sign. It's happened before major selloffs in 2018 and 2020. Right now it's 88, so there's room. But if it starts creeping up while the VIX drifts lower, that's the divergence that should make dip buyers cautious. Luna: So the message is: enjoy the rally, but keep your eyes on the VVIX, not just the VIX. Lucas: Exactly. And check the yield curve, too. A 35-basis-point spread is not alarming, but if it widens to 50 or more, that's usually a sign that the bond market is demanding more term premium, which often correlates with equity volatility down the road. Luna: Alright. So for the next few weeks, we'll be watching those two indicators: VVIX and the 10-year minus 2-year spread. Lucas: And we'll report back. Thanks for listening, and we'll see you in the next episode.