Wednesday, June 25, 2014

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.


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.



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.


I'm not done with the Russell indexes.

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