I flipped a coin and decided to start with the Russell 2000 (RUT) volatility action last week. I was 50 – 50 on what to begin with as I found both RVX and VXN price action equally of interest last week, but not for the same reasons. The poor RUT lost 2.41% last week which puts the small cap index down 3.81% for 2014. Also this year RVX has been elevated relative to recent history and the two other tradable broad based volatility indexes (VXN and VIX). The 12% gain in RVX last week was actually much less than the move higher in VIX and VXN. As mentioned RVX is at elevated levels to the VIX and VXN so there a higher base when determining the price move. However, RVX rose 2.15 points while VIX was up 2.74 and VXN moved up 3.05 points. Remember implied volatility is an anticipatory measure and the higher level of RVX can be taken as an indication that RUT will drop more than the S&P 500 or Nadaq-100 (NDX) if there is any weakness in the US markets.
VXN was over 22% higher. As mentioned above VXN rose more on an absolute basis than VIX or RVX last week. In addition to the move lower in the underlying market (NDX) VXN is also displaying a bit of anticipation (or worry) in front of 3rd quarter earnings which kicks off in just over a week.
The two curves are slightly different and I’m going to play the earnings card here as well. The flatter VXN curve may be showing an expectation of lower levels in time as earnings season passes. The steeper RVX curve tells me that the market still thinks there is more risk in small cap than large cap stocks.