I’m going to start with the Nasdaq-100 because I have a lot more to say about Russell 2000 volatility this week. VXN was down about 6% despite the underlying market rising only a little last week. This is one of those time periods where VXN and RVX both appear to take the lead from VIX more than in reaction to what may be going on in the underlying market.
Every weekend there is something that always gets me a bit excited when reviewing what has been going on in the world of volatility. This week the price action in RVX is really getting my attention. Despite RUT losing a little ground on the week RVX was down 6%. Everyone that watches the markets knows 2014 has been a tough year for the Russell 2000 and the small cap sector. In the volatility space this has shown up with RVX being at a bigger premium relative to VIX than has been the norm in past years. The chart below shows a ratio created by dividing the closing price for RVX by VIX each day in 2014.
My initial intent behind putting up this chart was just to show that RVX is just below the average normal premium for 2014 (1.40 shown in purple above) and note that this may be the option market signaling less concern about small caps relative to large cap stocks. What also caught my attention was the closing ratio on October 15th. It is rare that RVX closes lower than VIX and to be totally honest – I missed this until today.
The next move was to see what the S&P 500 and Russell 2000 have done since October 15th. I was honestly surprised to see the Russell 2000 is up 9.41% while the S&P 500 is up 9.10%, especially since RUT was down last week. I expected RUT to be higher, but not to a greater extent than the S&P 500.
There are two takeaways from all of this – (1) the option market correctly signaled lower risk in small caps and (2) relative to the recent history the option market price action is showing less concern about the Russell 2000 relative to the S&P 500.
Finishing up and taking a look at futures markets a couple of things stand out. VXN is in a state of complacent looking contango. RVX is in pretty steep contango which is normal, but when the curve is this steep you question the risk being discounted by the futures pricing. In plain speak, despite the talk above about RVX showing less risk for small cap stocks relative to large cap stocks, the futures pricing indicates a bit of continued nervousness.