Visual Meteorological Conditions, or VMC, are a set of weather conditions that allow for flying VFR.
Generally, VMC means good weather, but it also technically means that you are far enough between the clouds to allow for safe VFR flying.
For example, when flying IFR you might be popping in and out of clouds every few minutes.
If ATC notifies you about traffic then you must try to find the other plane. However, this only applies if you are in visual conditions at that moment. If you happen to be inside of a cloud you just respond with “IMC”.
In addition, it is also possible that you are near clouds and you can’t see the other plane because he is in a cloud. I will always take a quick look but if there is a chance that I can’t see the other plane because there is a large cloud right where he should be, I will still say “IMC”.
I am letting the controller know that the conditions where I am flying are not sufficient for VFR, even though I may be outside of a cloud at that time.