After making 23 new highs and rallying over 10% in 2018, last Friday’s Russell 2000 price action was telling a story which caught my attention.  The Russell 2000 Index experienced a sharp -2% sell off and broke through the 50 day moving average on higher than normal volume.   Was this simply profit taking? 

Cboe’s VIX Index is often times referred to as the “fear gauge” as a measure for the 30 day expected volatility in the S&P 500.  Similarly, Cboe’s Russell 2000 Volatility Index uses the same methodology used to calculate the RVX Index. The recent movement in RVX might offer some clues towards short term price movements in the U.S. small-cap stocks. 

RVX Index Mean Reversion

Over the last 5 years, the RVX Index averaged 18.85.  The monthly level on RVX has been below average 15 out of the last 18 months.  With the recent sell off, Friday’s RVX Index was at 16.56 moving closer towards its average.

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RVX vs VIX Relatively Low

With RUT outperforming SPX this year, the volatility levels in RVX have been relatively low compared to VIX.  Over the past 5 years, RVX carried a 3.87 premium over VIX reflecting the higher volatility in U.S. small-cap stocks over large-caps.  The recent increase in RVX also widened the RVX – VIX differential to 3.53 as the demand for protection in U.S. small-caps picked up.
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RVX – Waze of the Future?

There’s a cool mobile app called Waze that helps users navigate the fastest route to get to a destination forecasting traffic patterns.  In the same vein, monitoring RVX can potentially help investors prepare for changes in market sentiment.  Recent moves in RVX appear to raise the possibility of more short term profit taking in U.S. small-caps.

For additional information on RUT and RVX:

Russell 2000 Index options – www.cboe.com/RUT

Cboe Russell 2000 Volatility Index – www.cboe.com/RVX