Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How the VIX at 18 and VVIX at 104 Signal a Volatility Regime Shift
Transcript
- Lucas: So here's the thing — on a day when the S&P 500 is down just three-tenths of a percent over the last five days, the VIX has jumped over six percent to 18.20. And the VVIX — the volatility of volatility — is now at 104 and a half, up nearly ten percent. Luna: That's a big move for the VVIX. It's been creeping up for weeks, but 104 feels like crossing a threshold. Lucas: Exactly. And what's interesting is that this isn't a panic. The S&P is at 7,492, basically flat. The Dow is near 52,400. The Nasdaq is off a bit more, down 0.8 percent in five days, but nothing dramatic. Luna: So the calm index is calm, but the volatility of volatility is signaling something else. What do you make of that? Lucas: I think it's a sign that the market is bracing for something specific — a tail event that's hard to predict but that options dealers are starting to hedge against. The VVIX measures the implied volatility of VIX options, so when it jumps, it means traders are pricing in a higher chance of a sudden VIX spike. And a VIX spike typically means stocks are about to get hit. Luna: Right, and we've seen this pattern before — in late 2018 before the Q4 selloff, in February 2020 before COVID really hit the US, and even in September 2022 during the UK gilt crisis. Lucas: Those are all good examples. What's different now is that the yield curve is still inverted — the 10-year Treasury is at 4.55 percent, the 2-year at 4.13, so the spread is 41 basis points. Still inverted. And the 30-year is at 5.08 percent, which is a level that historically has caused stress in housing and corporate borrowing. Luna: So you've got a bond market that's still flashing recession, a Fed that's talking about higher rates — Dallas Fed President Logan yesterday said she wants 'modestly' higher rates — and a vol of vol index screaming that something's off. But the stock market is basically ignoring all of it. Lucas: It's a classic regime where complacency meets anxiety. The VIX at 18 is not screaming fear — it's above the long-term median of around 17, but it's not in panic territory. The VVIX at 104, though — that's in the 90th percentile of its historical range. That tells me that the risk premium is being mispriced. Luna: One way to think about it is the ratio — VVIX divided by VIX. Normally it's around 5 or 6. At 104 divided by 18, you're at about 5.8. That's not extreme, but the absolute levels matter. Lucas: And the absolute level of VVIX at 104 means that the cost of hedging tail risk is high. If you want to buy VIX calls to protect against a crash, you're paying a hefty premium. That could actually be a contrarian signal — when hedging is expensive, the crash might not happen, but if it does, the payoff is enormous. Luna: But it also means that short volatility strategies — like selling VIX futures or put spreads — are collecting a very fat premium right now. That's tempting, but it's how blow-ups happen. Remember XIV in 2018? Lucas: Exactly. The VelocityShares Daily Inverse VIX Short-Term ETN, XIV, lost over 90 percent of its value in a single day in February 2018 when the VIX spiked. And we're seeing similar dynamics now — low VIX, high VVIX, complacent equity market. The risk of a short vol blow-up is real. Luna: Let me ask you this — what's the specific catalyst that could trigger the spike? Is it an economic data miss? A hawkish Fed surprise? Something geopolitical? Lucas: It could be any of those, but I think the most likely trigger is a liquidity event in the Treasury market. The 30-year yield at 5.08 percent is a level where pension funds and insurance companies start to rebalance, and if there's a sudden selloff in long-dated bonds, it could spill into equities. Luna: We saw that in the UK in 2022 — the gilt crisis forced leveraged liability-driven investors to dump everything. That sent the VIX from 20 to 36 in a matter of days. Lucas: Right. And the VIX term structure is already in contango — futures are above spot — but if that flips to backwardation, you get a violent spike. The VVIX at 104 suggests that options market makers are pricing in a non-trivial chance of that flip. Luna: So what should a listener do with this information? Just sit tight? Buy puts? Sell everything? Lucas: I think the most prudent move is to check your portfolio's tail risk. If you have a concentrated position in high-beta stocks or leveraged ETFs, consider hedging with VIX calls or put spreads on the S&P. The cost is high, but it's like buying fire insurance in a drought season. Luna: Alternatively, you could reduce exposure to small caps — the Russell 2000 is only at 2,962, up 0.3 percent over five days, but it's been underperforming the S&P. That index is more sensitive to recession fears and credit conditions. Lucas: Good point. The Russell is actually up slightly while the S&P is down, so there's a divergence. But small caps have higher beta to the economy, and if the VIX spikes, they tend to get hit harder. Luna: You know, speaking of the show and the kind of analysis we do here — if our money conversations have helped you think about a decision differently, whether it's hedging or just understanding volatility, a couple of dollars a month is genuinely what keeps these going. It's buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Absolutely. It's listener support that lets us keep this ad-free and focused on the data. No pressure, but every bit helps. Luna: So back to the vol regime — one thing I find interesting is that the VVIX at 104 is also a signal that the VIX itself is likely to be more volatile. That means we could see the VIX swing between 15 and 25 in the coming weeks, rather than staying in a tight range. Lucas: And that's a regime shift from the first half of 2026, when the VIX was mostly in the 14 to 17 range. The VVIX was below 90 for much of that period. Now it's above 100, which historically has preceded at least a 10 percent correction in the S&P within three months. Luna: The last time VVIX was consistently above 100 was October 2023, just before the October 2023 selloff that took the S&P from 4,500 to 4,100. And before that, March 2020, obviously. Lucas: And in 2018, VVIX spiked to 150 in February, then again to 130 in October. Both times preceded double-digit declines. So the historical precedent is there. Luna: But let's not be alarmist. The macro backdrop is different — the economy is growing, real GDP growth was 2.1 percent annualized in Q1 2026, up from 0.5 percent in Q4 2025. Earnings have been solid. Lucas: True. But the bond market is screaming something the stock market is ignoring. The yield curve has been inverted for over two years now. That's historically the longest inversion since the late 1970s. And inversions have a very good track record of predicting recessions, even if the lead time is long. Luna: So you're saying the VVIX is pricing in a recession that the equity market hasn't accepted yet? Lucas: I think that's part of it. The VVIX is pricing in a higher probability of a tail event — maybe not a recession, but a sharp repricing. It could be a liquidity crisis, a credit event, or a geopolitical shock. The market is complacent because the economy feels OK, but the underlying plumbing is showing stress. Luna: And that's why I always tell people to pay attention to the vol of vol. It's like a canary in the coal mine. When it jumps, something is stirring beneath the surface. Lucas: So for the listener: keep an eye on the VIX term structure. If the front-month VIX futures move above the second-month, that's backwardation — that's when things get real. And if the VIX itself breaks above 25, that's a signal to reduce risk. Luna: And if you're a trader, be very careful with short vol positions right now. The premium is juicy, but the risk is asymmetric. One bad day can wipe out months of gains. Lucas: Exactly. The VVIX at 104 isn't a prediction — it's a probability distribution. It's saying the market sees a 10-15 percent chance of a VIX spike above 30 in the next month. That's not huge, but it's higher than it was three months ago. Luna: So the message is: prepare, don't panic. Small adjustments now can save a lot of pain later. Lucas: Well said. And we'll keep watching the data — the VIX, the VVIX, the yield curve — and let you know if the regime shifts further.