Tuesday, June 24, 2014

RVX/VIX, Russell 2000's Divergence with the S&P 500, and RUT and SPX's Performance Gap (Part 1)

This post was originally on the Dvolatility Research blog on 6/24/2014

First, I want to address a popular topic that was brought up on Twitter recently: the RVX/VIX ratio (Russell 2000’s volatility index/S&P 500’s volatility index). RVX/VIX made a new one-year and YTD high at the end of March right before RUT/SPX broke through an important support level from August 2013. Look at the massive divergence between RUT and SPX in the first chart. From April 1, 2014 to May 20, 2014, the S&P was up 0.03%, the Russell 2000 was down 6.41%, and the RVX/VIX ratio was up 4.13%.

Source: StockCharts.com

From January 1, 2014 to May 20, 2014, you can see that the major performance divergence between RUT and SPX occurred after RVX/VIX broke out and after a price divergence was confirmed (RUT made a lower high when SPX made a higher high, see the last two charts).

Source: StockCharts.com

But when looking at the one-year chart, you can see that the Russell 2000's one-year performance just pulled back to match (and sometimes underperform) the S&P’s.

Source: StockCharts.com

Source: StockCharts.com

The massive divergence between RUT and SPX and RVX/VIX's breakout accurately predicted RUT's plunge and its plunge relative to SPX (RUT/SPX). Divergences between small- and large-cap indexes should be watched closely going forward because I think the Russell 2000 will soon drag down the S&P 500.

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