Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why VVIX at 97 Signals a Volatility Regime Change
Transcript
- Lucas: The VIX is at 16.73 this morning, up about 11 percent over the last five days. That's enough to get people's attention, but honestly it's still below the long-term average. The number that's got my attention is the VVIX — the VIX's own volatility index — which is sitting at 97.3, up 11 and a half percent in the same period. Luna: So the VIX is up, but the VVIX is up even more proportionally. That's the divergence you've flagged before, right? Lucas: Exactly. The VIX measures expected S&P 500 volatility over the next 30 days. The VVIX measures expected volatility of the VIX itself. When the VVIX rises faster than the VIX, it suggests that options traders are pricing in a greater chance of a sudden jump in fear. It's like the market is saying, 'We're not that scared yet, but we're scared that we might get scared.' Luna: That's a useful framing. So 97.3 — is that a historically significant level? Lucas: It is. The VVIX has averaged around 85 to 90 over the last few years. When it breaks above 95 — and especially above 100 — it's often a precursor to a sharp move in equities. We saw this in late 2018, in February 2020, and more subtly in September 2022. Each time, the VIX followed higher within a couple of weeks. Luna: But the VIX is still at 16.7. So we're in that window where the VVIX is screaming but the VIX is still subdued. Lucas: Right. And that's exactly the pattern that tends to catch momentum traders off guard. The put option premiums are already rising relative to calls — you can see it in the skew — but the broader market hasn't repriced yet. The Russell 2000, for example, is basically flat over the last five days, down a tenth of a percent. That's remarkable given what's happening in the vol complex. Luna: The small caps are completely ignoring this signal. Is that a sign of complacency or just a different asset class dynamic? Lucas: I think it's complacency hiding inside a structural story. The Russell has been stuck around 2,975 for weeks. The S&P is near all-time highs, but small caps haven't participated in this rally at all. That divergence itself is a warning — historically, when leadership narrows and the broad market stalls, volatility tends to spike. The VVIX is just confirming that. Luna: So what does this mean for the average listener who's sitting on a balanced portfolio? Should they be making changes right now? Lucas: Not drastic ones, no. But I think it's a good time to check your hedges. If you've been thinking about buying some put protection on the S&P or increasing your cash allocation, this is the kind of signal that suggests it's worth acting on. Not because the market is about to crash tomorrow, but because the risk-reward of waiting has shifted. The VVIX doesn't predict the exact day, but it does tell you the window is narrowing. Luna: And if you don't use options, what's the simplest way to increase defensiveness? Lucas: Rotate a bit more into quality — companies with strong balance sheets, consistent free cash flow, low debt. Those tend to hold up better when vol spikes. Also consider trimming some of the high-beta names that have run up the most this year. The yield curve is also worth watching: the 10-year is at 4.55 percent, the 2-year at 4.13, so the spread is 41 basis points. That's still positive, but it's narrowing. If the curve starts to flatten again, that's another sign that growth expectations are softening. Luna: The curve has actually flattened a bit just this week — down one basis point from yesterday. So that's consistent with the VVIX story. Lucas: Exactly. All these signals are aligning: VVIX elevated, small caps lagging, yield curve flattening slightly. It's not a smoking gun, but it's enough to make a prudent investor pay attention. And I think the worst thing you can do in this environment is ignore the data because the headline VIX looks benign. Luna: Yeah, the VIX at 16.7 has a way of lulling people into a false sense of security. But the VVIX is like the check engine light that the VIX doesn't want you to see. Lucas: That's a great analogy. And speaking of things that don't get enough attention — it's worth mentioning that keeping this podcast ad-free and independent is only possible because of listeners who chip in a couple of bucks. If our conversations have helped you think about a decision differently, or if you've learned something you've used, you can support us at buy me a coffee dot com slash fexingo. Even a small amount makes a real difference. Luna: Absolutely. It's how we keep the lights on without having to run ads or sponsored segments. So if you've gotten value from the show, that's where you can give back. Lucas: Alright, back to the VVIX. One thing I want to highlight is that the VVIX at 97.3 isn't just a number — it's a sign that the options market is pricing in a much higher probability of a tail event. The VIX options are implying that there's a non-trivial chance the VIX itself could spike above 30 in the next month. That's a big deal because a VIX above 30 historically corresponds to S&P 500 drawdowns of 5 to 10 percent or more. Luna: So the market is essentially betting on a volatility explosion, even if the spot VIX hasn't moved yet. That's a classic leading indicator. Lucas: Right. And it's not just the level — it's the rate of change. The VVIX has risen from around 87 to 97 in just five days. That's an 11 percent increase. When you see that kind of velocity, it often precedes a VIX spike by one to two weeks. So we're in that danger zone where the next few trading sessions are critical. Luna: What about the Nasdaq? It's down 1.5 percent over the last five days, which is more than the S&P's 0.5 percent decline. Is that the VVIX signal already playing out in tech? Lucas: It could be. Tech is more sensitive to interest rate expectations and has a higher beta to volatility. The Dallas Fed president, Logan, said yesterday that rates need to go 'modestly' higher, which may have added to the pressure. But the VVIX signal predates that comment. So I think the sell-off in tech is partly a reaction to the same underlying risk repricing that the VVIX is capturing. Luna: So if someone is heavily weighted in growth or tech, they might want to take a look at their exposure right now. Lucas: I would. Not necessarily selling everything, but maybe taking some profits or setting stop-losses. The key is to have a plan before the volatility hits, not during it. Because once the VIX spikes, options become much more expensive, and panic selling tends to lock in losses. Luna: You mentioned the yield curve earlier. The 10-year at 4.55 and the 2-year at 4.13 — that's a spread of 41 basis points. How does that interact with the VVIX? Lucas: Good question. A steepening yield curve — which we've seen over the past few months — is usually a positive signal for economic growth. But a sudden flattening, or a reversal, can indicate that the market is pricing in a slowdown. The VVIX at 97 suggests that the options market sees a risk that the curve could invert again or that growth expectations could deteriorate. So the two are connected: the VVIX is the market's fear gauge, and the yield curve is the growth expectations gauge. When both start to flash, it's a double warning. Luna: So we have the VVIX elevated, the Nasdaq underperforming, the Russell flat, and the yield curve flattening slightly. That's a lot of yellow flags. Lucas: It is. But I want to be careful not to overstate it. The VVIX at 97 is not a guarantee of a crash. It's a signal that the probability of a sharp move has increased. The actual outcome depends on what triggers the move — a bad CPI print, a geopolitical event, a Fed surprise. But the market is telling us that it's ready to react violently to any surprise. Luna: And that's exactly why it's worth paying attention now, rather than after the fact. Lucas: Precisely. The goal isn't to predict the future. It's to manage risk. And right now, the VVIX is giving us a pretty clear message that the cost of being unprepared has gone up.