Russell 2000 Volatility Index Hits Record Lows: Trouble Ahead?

Small-Cap volatility expectations just smashed previous record lows.

I’ve written a fair amount lately on various themes related to volatility expectations in the stock market.

Many of these posts focused on the behavior of volatility expectations relative to their underlying stock market indices, including one last week on the “stand-off” between the Russell 2000 Small-Cap Index (INDEXRUSSELL:RUT) and the RUT Volatility Index (INDEXRUSSELL:RVX).

Today, we look simply at the level of the RVX itself. Why is that alone worthy of a post? Because the Russell 2000 Volatility Index just dropped to the lowest level in its history – by a long shot.

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Specifically, the Russell 2000 Volatility Index (RVX) closed last Friday at 11.83. That was 6.5% below its previous low close (12.65) from last Wednesday.

Furthermore, prior to June, there had been exactly 1 close ever below 14 (3/14/2013) – that’s nearly 20% higher than Friday’s new record low.

russell 2000 volatility index all time lows_small cap stocks_19 september 2017

Now, low volatility expectations aren’t necessarily a bad thing for stocks. In fact, stocks tend to do better when volatility expectations are low – to a point. However, as the chart shows, when the RVX has gotten to an extreme low level, e.g., less than 14.50 in this case, the RUT (and small cap stocks) typically struggle to sustain gains. For example, 1 month after the RVX’s previous 22 closes below 14.50, the Russell 2000 Index was higher just 4 times (several occurrences are too recent to register a 1-month reading). So it’s OK for small-cap investors to get comfortable – just don’t fall asleep.

In a premium post at The Lyons Share, we break down all of the results following the prior low RVX readings shown on the chart, in an attempt to discern whether or not the comfort level is indeed too low at the moment. We also take a quantitative look at an extremely rare signal generated today involving the Russell 2000 and the RVX – and one that has led to some very interesting results in the past.


Twitter:  @JLyonsFundMgmt

The author may have a position in mentioned securities at the time of publication.  Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.