Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How the VIX Term Structure Predicts the Next Market Move
Transcript
- Lucas: So the S&P 500 closed at 7,440 today, down 2.2 percent for the week. The Nasdaq took a bigger hit—down 3.7 percent over five days. And the VIX? It's up to 18.54, a 17.6 percent jump. Luna: Which sounds scary, but 18.5 is hardly panic territory. We've seen it hit 30, 40, even 80 in past selloffs. Lucas: Right. And that's exactly the trap a lot of investors fall into—they look at the spot VIX level and think, 'Well, it's only 18, so this is a buying opportunity.' But the VIX is just one number. The real story is in the term structure—the shape of VIX futures across different expiration months. Luna: You're talking about contango versus backwardation. Contango is when futures are higher than spot, backwardation is when they're lower. Lucas: Exactly. And right now, we're in contango. The front-month VIX futures are around 18.5, but contracts for three months out are near 20. That tells you the market expects volatility to stay elevated, but not spike. It's actually a relatively calm term structure. Luna: Which seems weird given the Nasdaq just dropped almost 4 percent in a week. Why isn't the curve more inverted? Lucas: Great question. Let's look at historical context. In March 2020, the VIX hit 82, and the futures curve went into deep backwardation—front-month futures were trading below spot, because everyone wanted immediate protection. That backwardation signaled that the worst was happening right then, but also that a rebound was coming. And sure enough, the market bottomed a few weeks later. Luna: Same thing in June 2022, when the VIX hit 34 and the curve flipped backwardated. The S&P 500 bottomed in October of that year. Lucas: Correct. In both cases, backwardation was a contrarian buy signal. It meant panic had peaked. Today, we have the opposite: contango, with the spot VIX at 18. That's actually closer to what we saw in late 2021, when the VIX was around 17 and the curve was in contango. The market sold off gradually over months, not in a crash. Luna: So you're saying the term structure suggests this selloff might have more room to run? Or at least that it's not a V-shaped recovery. Lucas: I'm saying the VIX futures market is pricing in a slow grind, not a panic climax. And if you look at the macro backdrop, that makes sense. GDP growth just came in at 1.6 percent annualized—that's down from 2.5 percent a year ago. The two-year Treasury yield is 4.05 percent, which means the Fed isn't cutting anytime soon. The jobs report on Friday was hot, so Chair Warsh has no reason to ease. Luna: So the economy is slowing, but not collapsing. Rate cuts are off the table. That's a recipe for a gradual repricing, not a crash. Lucas: Exactly. And the VIX term structure reflects that. The spread between the front-month and the six-month future is about 1.5 points. That's modest contango. It suggests investors are willing to pay a small premium for future protection, but they're not panicking. Historically, when that spread is above 2 points, it's a sign of complacency. Below zero, it's panic. Luna: So we're in the middle ground. What does that mean for someone trying to buy the dip? Should they wait? Lucas: The data says yes, be patient. In contango environments like this, buying the dip immediately after a 3-4 percent drop has a lower win rate. You're better off waiting for the VIX to either spike into backwardation—which would be a panic bottom—or for the contango to flatten and the spot VIX to drop back below 15, which would mean the selling is over. Luna: That's a useful framework. But let's talk about the VIX itself. It's at 18.54, but the VVIX—the volatility of volatility—is at 94. That's up only 4.3 percent for the week. In past episodes, we've talked about how a high VVIX relative to VIX can signal hidden fear. Lucas: Right. And 94 is elevated—the long-term average is around 80—but it's not screaming. In March 2020, the VVIX hit 150. In 2022, it hit 130. So the VVIX is saying there's some tail risk, but not a systemic event. That aligns with the contango message: the market is nervous, but not terrified. Luna: So if I'm an investor, what should I do? Just sit on my hands? Lucas: Not exactly. You can use this to set up trades. For example, if you believe the selloff will continue gradually, you could sell call spreads on the VIX—betting that volatility won't spike. Or if you think the contango will persist, you can short VIX futures and roll them, collecting the roll yield. But for a long-term investor, the main takeaway is: don't rush to buy. Let the term structure guide you. Luna: That's really helpful. And it's the kind of insight that's hard to find in the noise of daily headlines. Lucas: Yeah, and that's exactly why we do this show—to cut through the noise and give you something actionable. If today's episode helped you think about the market a little differently, that's the goal. And if you find value in these conversations, the way we keep them ad-free and honest is through listener support. Luna: Yeah, absolutely. No sponsors, no ads, just us and the data. So if you've gotten something out of today, consider tossing a coffee our way. Lucas: Exactly. You can do that at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. It's a small gesture that helps us keep doing this every day. Luna: And now back to the term structure—because there's one more piece I want to hit. The ten-year minus two-year spread has narrowed to 38 basis points. That's down from 42 last week. Lucas: Good catch. That spread is still positive, which means we're not in an inverted curve. But it's shrinking, which historically has been a precursor to economic slowdown. If the curve flattens further, that would reinforce the gradual-selloff thesis. Luna: So the term structure across both the VIX and the Treasury market is saying the same thing: slow down, don't panic, but don't get complacent. Lucas: Exactly. And that's a useful mindset for the weeks ahead. We'll keep watching the VIX curve and the VVIX for any change in regime. If we see a spike into backwardation, we'll be the first to let you know.