Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How the VIX at 16.87 Signals Investor Complacency
Transcript
- Lucas: The VIX closed at 16.87 today. That's down over 13 percent in the last five days, and it's the lowest we've seen since early April. Luna: So the fear gauge is basically saying chill out? But the S&P is at 7,511, up 1.6% over the same period. Feels a little too comfortable. Lucas: That's the question, right? Are we actually in a low-volatility regime, or are we seeing the kind of complacency that tends to precede a sharp move? The VVIX — the volatility of volatility — is at 91, down about 9.5%. Luna: Ninety-one is not extreme, but it's not nothing either. Historically, when the VVIX drops below 100 while the VIX is in the teens, it often signals that options market makers are pricing in a very low probability of tail events. Lucas: Exactly. And we've seen this movie before. In 2017, the VIX averaged around 11, and everyone said volatility was dead. Then February 2018 hit — the Volmageddon event — and the VIX spiked to 50 in a single day. Luna: That was a structural unwind of short-volatility products, though. We don't have that same level of leveraged short-vol ETFs today. The product landscape is different. Lucas: Fair point. But the psychology is similar. When the VIX is low and falling, investors tend to extend duration, take on more credit risk, and pile into high-beta stocks. The Russell 2000 is up 1.8% in the last five days, outperforming the Nasdaq's 2.2%. Luna: Small caps catching a bid is usually a risk-on signal. But I want to push back on the complacency narrative a bit. The yield curve is still inverted — 10-year at 4.47, 2-year at 4.07, spread at 38 basis points. That's not a screaming all-clear. Lucas: No, it's not. And the Fed just held rates steady at Warsh's first meeting. The market is pricing in maybe one cut this year, but the timing is uncertain. So you've got this tension: low vol on the surface, but macro uncertainty underneath. Luna: That tension is exactly what makes the VIX interesting right now. If the VIX were at 12, I'd be more worried about complacency. At 16.87, it's not screaming danger, but it's not pricing in a crisis either. Lucas: Let's look at the term structure. The VIX futures curve is in contango — front-month around 16.5, second-month around 18. That's a normal upward slope. It suggests the market expects volatility to rise moderately over the next few months. Luna: But contango is typical. The question is the steepness. If the back month were at 22 or 23, that would signal more fear. At 18, it's pretty benign. Lucas: Right. So the options market is not screaming. But let's talk about realized vs. implied. The 20-day realized volatility on the S&P is around 12%. So implied at 16.87 is actually a premium of about 40% over realized. That's not historically high, but it's not cheap either. Luna: Which means if you're hedging, you're paying up a bit. But if you're a seller of volatility, you're collecting a decent premium for taking on tail risk. Lucas: And that's exactly the trade that blew up in 2018. Selling vol when it's already low feels like picking up pennies in front of a steamroller. The carry is attractive, but the left tail is fat. Luna: So what's the play for the average listener? If you're a long-term investor, do you even care about the VIX? Lucas: I think you should care, but not in a trading sense. The VIX is a measure of market fear, and when it's low, it tends to correlate with higher valuations. The S&P 500 is trading at about 21 times forward earnings here. That's above the long-term average. Luna: So low vol supports high multiples, but it also makes you vulnerable to a re-rating if vol spikes. Lucas: Precisely. And the thing is, we've had a pretty calm year so far. The VIX has only closed above 20 twice in 2026 — once in January and once in April. Both times it came back down quickly. That can lull you into thinking the next spike will also be short-lived. Luna: But it might not be. We have geopolitical risks — China pushing for AI safety at the G7, trade tensions never fully resolved. And we have domestic political uncertainty with midterms coming. Lucas: Yeah. And the market is pricing a lot of that in already. The VIX at 16.87 is not complacent, in my view. It's more like cautious optimism. But the margin for error is thin. Luna: If our money conversations have helped you think about a decision differently — whether it's hedging a portfolio, or just understanding what the VIX actually means — that's what we're here for. We deliberately don't run ads on these episodes. Lucas: And that's a choice we're proud of. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. It's a simple way to keep this ad-free and focused on the substance. Luna: Yeah, no pressure. Just if it's valuable to you. Now, back to the VIX — one thing I want to drill into is what the VVIX at 91 tells us about the options market's view on tail risk. Lucas: Good. The VVIX measures the implied volatility of VIX options. It's essentially a measure of how much the market expects the VIX itself to move. At 91, it's in the 60th percentile historically — elevated but not extreme. Luna: So the market is pricing in a non-trivial chance of a VIX spike, but not a crisis. If the VVIX were above 120, that would indicate fear of a tail event. Lucas: Exactly. And the vix vvix ratio is about 0.185. Historically, when that ratio drops below 0.15, it's a bullish signal for equities. When it goes above 0.25, it's bearish. We're in the middle. Luna: So the signal is mixed. Not screaming buy, not screaming sell. Just kind of 'stay the course but keep your seatbelt on.' Lucas: That's about right. I think the key takeaway for today is that low vol doesn't mean no risk. It means the risk is being underappreciated. And the best time to prepare for volatility is when it's cheap to hedge. Luna: So you're suggesting listeners look at put spreads or VIX calls? Lucas: Not necessarily for everyone. But if you have a concentrated portfolio, maybe consider some tail risk hedging. A 1% cost today could save you 10% in a drawdown. The VIX at 16.87 makes that hedge cheaper than it was at 20. Luna: Fair. And we should note that the VIX is not a predictor of direction. It's a measure of expected magnitude. A low VIX doesn't mean the market will go up; it means the market expects small moves. Lucas: Right. And small moves can still be down. Look at the Nasdaq at 26,369 — it's up 2.2% on the week, but that's after a pullback in May. The tape is choppy. Luna: Choppy but not scary. And that's exactly the kind of environment where complacency can creep in. So I'm glad we're having this conversation. Lucas: Me too. Let's keep an eye on the VIX term structure next week. If the back month starts to rise, that could be an early warning. For now, we're in a low-vol regime, but we know how quickly that can change.