Russell Index Analysis: RUI vs. RUT (Russell 1000/Russell 2000) (Part 2)

This post was originally on the Dvolatility Research blog on 6/25/2014.

RUI/RUT has been in a strong downtrend since 2000, but I think it will try to break out in 2014 or 2015. The ratio attempted to break out earlier this year, but failed. If a breakout is successful, it would simply mean that large-cap stocks are ready to outperform small-cap stocks. To me, this seems like a highly probable scenario because the Russell 2000 (RUT) is overvalued and overbought here relative to the Russell 1000 (RUI) on a secular basis. Small-cap stocks could fall harder than large-cap stocks when equity risk gets repriced during the next major correction, which I think is near, or the next bear market. RUT's correction may have already begun.


Source: StockCharts.com

The RUI/RUT ratio crashed between 2000 and 2007 because RUI didn't make a new secular high in 2007 like RUT did. Since 1991 and 2000, small-caps have significantly outperformed large-caps in the Russell 3000.

Source: StockCharts.com

Source: StockCharts.com

Since 2009, both RUI and RUT have been rising in ascending channels with the same exact slope. And since RUT pulled back recently at channel resistance, I think RUI is getting ahead of itself here. Look at the recent divergence on the chart below (my previous post has better charts on this). But, again, I think the RUI/RUT ratio will end up breaking out soon.

Source: StockCharts.com

I'm not done with the Russell indexes.

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