Small Caps’ Volatility Diverges From Price: Which Will Blink First?

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March 17, 2017 6:36am NYSE:IWM

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From Dana Lyons: Though the Russell 2000 is off its highs, its volatility expectations are hitting 52-week lows; which is correct?


A couple times in recent months (here and here), we have written posts pointing out odd behavior between the S&P 500 and the S&P 500 Volatility Index, a.k.a., the VIX. Since stocks and their related volatility indices typically move in opposite directions, it was odd to see the 2 moving in concert, even if it was just in the very short-term. Each time, we asked the question, “who will blink, the S&P 500 or the VIX?” As it turns out, arguably it was the VIX that blinked both times, eventually reversing course to a more conventional path given the direction of the S&P 500.

Today, we ask a similar question regarding the Russell 2000 Small-Cap Index (RUT), and the Russell 2000 Volatility Index (RVX). The impetus behind the question is the unusual set of circumstances currently present in the two data series. Specifically, The RVX recently closed at a 52-week low while the Russell 2000 was more than 2% off of its recent high.

That may not seem all that extraordinary. However, since the inception of the RVX in 2006, it is just the 6th unique time that the RVX has hit a 52-week low while the RUT was at least 1% below its 52-week high.

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So what is the message being sent here? Judging by the prior events, there appears to be a clear favorite for who is most likely to blink.

See the “all-access” breakdown of this unusual and telling small-cap phenomenon – as well as our complete macro market analysis every day – at our new site, The Lyons Share.

The iShares Russell 2000 Index ETF (NYSE:IWM) fell $0.09 (-0.07%) in premarket trading Friday. Year-to-date, IWM has gained 2.27%, versus a 6.69% rise in the benchmark S&P 500 index during the same period.

IWM currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 28 ETFs in the Small Cap Blend ETFs category.


This article is brought to you courtesy of Dana Lyons, JLFMI and My401kPro.


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