Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the VIX at 19 and VVIX at 105 Are a Dangerous Combo
Transcript
- Lucas: So the VIX is sitting at 18.77 this morning, up about nine and a half percent over the last five days. And the VVIX, which is the volatility of the VIX, is at 104.87, up ten percent. Luna: That's not a small move. And it's not just one day either—we've been seeing this creep for weeks now. Lucas: Exactly. And I think the combination of both being elevated is something investors should really pay attention to. The VIX above 18 tells us options traders are pricing in some fear. But the VVIX above 100 tells us that the market is uncertain about that fear itself. It's like fear about fear. Luna: Which historically tends to lead to sharp moves. When the VVIX gets that high, it usually precedes a volatility spike, not just a slow grind. Lucas: Right. And we saw this pattern in late 2018, heading into the Q4 sell-off. Back then, the VIX hovered around 16 to 18 for a few months, and the VVIX stayed above 95. Then October hit, and the VIX went to 25, then 36 by December. Luna: So you're saying this feels similar? Because right now we have a strong economy—GDP growth at 2.1 percent, corporate earnings still decent. It's not obviously a crisis setup. Lucas: That's what makes it tricky. The macro data doesn't scream recession. Real GDP is growing, unemployment is low. But the fixed-income market is telling a different story. The yield curve has been steepening—the ten-year is at 4.57, the two-year at 4.16, so the spread is 37 basis points. Luna: Which is actually still positive, but it's been narrowing recently. Down from 41 basis points a week ago. Lucas: Yeah, and a steepening curve can mean investors expect stronger growth, but it can also mean they expect higher inflation or more Treasury supply. The problem is, when the curve steepens and the VIX is up, it often signals that the 'good' steepening—growth optimism—is turning into 'bad' steepening—inflation fears or Fed tightening. Luna: And Dallas Fed President Logan just called for modestly higher rates. So the market has to digest that. Lucas: Exactly. So you've got a Fed that might not be done, a VIX that's elevated, and a VVIX that's signaling panic in the options market. That's a dangerous combo for anyone who's been complacent. Luna: Let's talk about the Russell 2000. It's actually up 0.3 percent over the last five days, which is interesting given the broader market is down. Small caps seem to be hanging in there. Lucas: They are, but that might be a false signal. Historically, small caps are more sensitive to economic cycles. If we're heading into a slowdown, they should be underperforming, not outperforming. The fact that they're flat while the S&P is down could mean investors are rotating into value or domestic names, but it could also mean they're ignoring the risks. Luna: Maybe it's a liquidity thing. Or maybe small caps are just cheaper on a price to earnings basis, so they're less vulnerable to multiple compression. Lucas: Could be. But the VVIX at 105 is a red flag for all risk assets, including small caps. When options dealers get nervous, they hedge by selling futures or buying puts, which can cascade into broader selling. And small caps tend to get hit harder because they're less liquid. Luna: So what's the play here? Do you just sit in cash? Lucas: Not necessarily. But I think it's a time to be more tactical. If you have a long-term portfolio, you might want to hedge with some put spreads or increase your allocation to defensive sectors. Utilities, health care, consumer staples—they tend to hold up better when volatility spikes. Luna: And maybe avoid chasing momentum in high-beta names. Because when the VIX jumps, those are the first to get sold. Lucas: Absolutely. I'd also keep an eye on the VIX term structure. If the futures are in contango but the spot VIX is rising, that's normal. But if the futures start going into backwardation—where near-term contracts are more expensive than longer-dated ones—that's a sign of acute stress. Luna: We're not there yet. The VIX futures curve is still in contango, but the front-month has been creeping up. Lucas: Right. So we're in a yellow zone, not red. But the VVIX at 105 is a yellow zone that could turn red quickly. The last time the VVIX was this high relative to the VIX was in early 2020, right before the COVID crash. Luna: That's a sobering comparison. But let's not get too dramatic—the economy is in much better shape now than it was then. Lucas: No question. But markets don't always wait for a recession to sell off. Sometimes they just need a trigger. And when the VVIX is this high, the market is essentially saying it's ready to overreact to any bad news. Luna: If today was actually useful to you, the way these episodes stay ad-free is listener support. You can buy me a coffee at buy me a coffee dot com slash fexingo. Lucas: Yeah, we really appreciate that. It keeps the show independent and lets us dig into these topics without any sponsors pulling the strings. Luna: Absolutely. Okay, back to the volatility regime. So we've got the VIX at 19, VVIX at 105, and a steepening yield curve. What's the one thing you'd tell a listener to do this week? Lucas: Check your portfolio's beta. If you're heavily weighted in high-growth tech or small caps, consider trimming or hedging. And don't panic if the VIX jumps to 25—that's still historically moderate. The real danger is if it goes to 30 or 35 quickly, which the VVIX is hinting at. Luna: So stay diversified, stay liquid, and don't make big bets either way. Lucas: Exactly. The market is telling us it's uncertain, and the best response to uncertainty is humility. You don't have to predict the next move—you just have to be ready for it.