Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How the VIX at 15 Point 8 Is Misleading Dip Buyers
Transcript
- Lucas: The VIX closed today at 15.81, down more than eight percent on the week. The S&P 500 just hit a new record above 7,480. On the surface, that looks like the all-clear signal for dip buyers. Luna: So buy the dip? Seems pretty straightforward. But I'm guessing there's a catch. Lucas: There is. The VIX is low, but the VVIX — the volatility of volatility index — is at 88.8. That's not elevated by crisis standards, but for a market surfing at all-time highs, it's telling a different story. Options dealers are pricing in uncertainty about the uncertainty. Luna: Right, the VIX measures expected volatility in the S&P 500 over the next 30 days. The VVIX measures expected volatility in the VIX itself. When the VIX is low but the VVIX stays high, what does that signal? Lucas: It signals that traders expect the VIX to spike — they just don't know when. The market is pricing a high probability of a volatility event without a trigger yet. That's a classic setup for a bull trap. We saw something similar in early 2018, right before the volmageddon spike. Luna: So the low VIX is a siren song. But what else in today's data supports the cautionary view? Lucas: Look at the yield curve. The 10-year Treasury hit 4.48 percent today, up from 4.44 last week. The 2-year is at 4.17. That spread is now 35 basis points, and it's been widening. A steepening yield curve typically means the bond market expects stronger growth — or higher inflation. But it also means the Fed is likely to keep rates higher for longer, which is a headwind for the rate-sensitive parts of the economy. Luna: And small caps feel that first. The Russell 2000 is down half a percent this week, even as the Nasdaq is up over 2 percent. That's a big divergence. Lucas: Exactly. The Russell is basically flat year-to-date. The big-cap tech rally is masking weakness under the hood. If you're buying the dip in the Nasdaq, you're buying a narrow market. And that's historically been a warning sign. Luna: Let's talk about that. What does the evidence say about buying dips when market breadth is deteriorating? Lucas: I pulled up some research from Ned Davis Research. They looked at every 5 percent S&P pullback since 1990. When the percentage of stocks above their 50-day moving average was below 40 percent at the start of the bounce, the rally failed within three months more than 60 percent of the time. Today, that metric is around 55 percent — not terrible, but it was above 70 percent back in March. Luna: Fifty-five percent means nearly half of stocks are below their 50-day average. That's not a broad rally. Lucas: It's not. And add to that the VVIX signal, the steepening yield curve, and the Russell lagging. I'm not saying we're headed for a crash. But buying the dip based on the VIX alone is like checking your tire pressure and ignoring the engine light. Luna: So what would you do if you're a listener with cash on the sidelines? Not buy anything? Lucas: I'd be selective. The dividend aristocrats have been outperforming during this volatility — as we talked about in episode 82. That strategy still holds. Also, I'd look at inverse ETFs as a small hedge, not a big bet. And I'd watch the VVIX. If it drops below 80 while the VIX stays low, that's a more reliable all-clear. Luna: The VVIX is a lesser-known indicator, but it's incredibly useful. For listeners who trade options, it directly affects the price of VIX options and futures. Lucas: That's right. When the VVIX is elevated, VIX call options are more expensive. So hedging tail risk costs more. The market is implicitly saying: something could happen, and we're not sure what. Luna: Honestly, if this conversation has helped you think about a decision differently, I hope you consider supporting the show. We keep it ad-free and listener-supported because we think that keeps the advice cleaner. If it was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Lucas: That really does make a difference. And speaking of decisions, let's dig into one more data point that reinforces the caution — the 30-year Treasury yield. Luna: Sure. The 30-year closed at 4.97 percent, up from 4.91 last week. That's getting close to 5 percent. For anyone with a mortgage or a bond portfolio, that matters. Lucas: The long end of the curve is moving higher faster than the short end. That's a steepening move driven by term premium — investors demanding more compensation for holding long-term bonds given the uncertainty about inflation and fiscal policy. Luna: And that feeds back into equities. Higher long-term rates make stocks less attractive relative to bonds, especially growth stocks whose cash flows are far in the future. Lucas: Exactly. So the tech-heavy Nasdaq might be rallying now, but if the 30-year breaks above 5 percent, you could see a rotation out of tech and into value. That's another reason the low VIX might be misleading. Luna: Let's bring it back to the listener. If you're sitting on a portfolio that's up this year thanks to big tech, what's your move? Lucas: I'd rebalance. Take some profits in the winners and add to areas that have been left behind — small caps, value, international. The Russell 2000 might be down this week, but it's cheap on a price to earnings basis relative to the S&P 500. The spread is near its widest in 20 years. Luna: Value stocks have been out of favor for so long that many investors have given up. But that's exactly when they tend to rebound. Lucas: Yeah, mean reversion is a powerful force. And the data is clear: when the valuation gap between growth and value is this extreme, value outperforms over the next three to five years. That's not a timing call, it's a structural call. Luna: And if you still want to own tech, maybe look at the ones that pay dividends. Like the dividend aristocrats we mentioned. They offer some cushion. Lucas: For sure. So, to wrap this up: the VIX at 15.81 looks like a green light, but the VVIX, the yield curve, and the Russell divergence say proceed with caution. Buy the dip if you want, but do it with a list — not a blanket check. Luna: I think that's a good note to end on. Thanks, Lucas. Lucas: Thanks, Luna. Talk to everyone next time.