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Volatility Not Buying Small-Cap Rally?

Despite the big small-cap rally yesterday, the volatility market didn't budge.

After holding key support levels in prior days, the recent market laggards scored big gains yesterday. This includes the Russell 2000 Small-Cap Index (RUT) which jumped some 3.5%. However, despite the big rally, the Russell 2000 Volatility Index (RVX) refused to budge (it was down .02). Normally such a rise in the stock index would see a sizable decline in volatility expectations. In fact, of the 104 days that saw the RUT rise roughly 3% or more since 2006, the RVX has averaged a decline of more than -7%. Furthermore, before yesterday, just 7 of those days saw the RVX close higher or essentially unchanged -- none in the past decade.

So, what is this data point telling us? Is the volatility market "smarter" than the equity market? And, thus, is this a warning of the potential unsustainability of the small-cap bounce? There is anecdotal, if not statistically significant evidence to support an affirmative answer to both those questions. We do observe similar incidents in August 2007 and September 2008 that preceded massive market declines. On the other hand, the last several occurrences took place in the aftermath of the March 2009 market low which simply led to a further extension of the equity rally.

So, the jury is out on this 1-day phenomenon. We will say, however, that the refusal of the volatility market, in general, to break below key support levels should be a concern for stock market bulls. Until that support gives way, it may keep a lid on stock prices.

How much “stock” are we putting into this data point? How is it impacting out investment posture? If you’re interested in an “all-access” pass to all of our charts, research — and investment moves — please check out our site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

#$^RUT #$^RVX #$IWM

Trendline Wednesday – 11/27/2019

Here are some of the most noteworthy trendline developments across the markets for Wednesday, November 27, 2019.

Bitcoin Testing Post-2015 Up Trendline $BTC $BTC.X

Value Line Geometric Composite $VALUG Bouncing Off Broken Post-2018 Down Trendline

iShares Biotechnology ETF $IBB Testing Post-2015 Down Trendline

Russell 2000 Volatility Index $RVX Hitting Broken Post-2018 Down Trendline Again

Wheat Testing Decade-Long Down Trendline

iShares Australia ETF $EWA Testing Post-2007 Down Trendline

If you’d like to see these charts as they come out in real-time, follow us on Twitter and StockTwits. And if you’re interested in the daily “all-access” version of all our charts and research, please check out our site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. PLUS>>our BIGGEST SALE OF THE YEAR is going on right now, so there's never been a better time to sign up! Thanks for reading!

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#$EWA #$WEAT #$IBB #$^RVX #$^VALUG #$BTC #$BTC.X #$BTCUSD=X

Small-Cap Investors More Comfortable Than Ever

Small-Cap volatility expectations just smashed their previous record lows.

We’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 indices, including one last week on the “stand-off” between the Russell 2000 Small-Cap Index (RUT) and the RUT Volatility Index (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.

Specifically, the 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.

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 has typically struggled to sustain gains. For example, 1 month after the RVX’s previous 22 closes below 14.50, the Russell 2000 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.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. Considering what we believe will be a very difficult investment climate for awhile, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!

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#$^RUT #$^RVX #$IWM #$TWM #$UWM

Equity Vs. Volatility Standoff: Small-Cap Edition

Small-Cap volatility expectations are hitting new lows, yet the stocks are well below their highs -- which one is right?

We’ve noted peculiar divergences between stock indices and their underlying volatility indices on several occasions this year. Of course, the two entities generally move opposite one another, with one often hitting new highs while the other is scoring new lows. Most recently, on September 8, we highlighted the fact that while the Nasdaq 100 (NDX) had just hit another 52-week high, the NDX Volatility Index (VXN) had not even registered as much as a 3-month low in more than 5 months. As we always do, we wondered which of the 2 sides in this “standoff” was correct. So far, given this week’s continued rally in the NDX, it appears that the stocks have it right. Although, just 2 days in, we’d have to say that the jury’s still out on this one.

Today’s stock vs. volatility standoff comes from the small-cap equity space. It also represents the opposite scenario than the one involving the NDX. Specifically, the Russell 2000 Small-Cap Index (RUT) is presently firmly below its 52-week high set back in July, while the Volatility Index on the Russell 2000 (RVX) hit a new 52-week low on Monday. And in fact, at 2.5% below its 52-week high, this marks the furthest the RUT has ever been away from a 52-week high on a day the RVX closed at a 52-week low outside of a few days in August 2012.

As today’s Chart Of The Day reveals, there have only been a handful of unique similar occasions when the RUT was as much as 1% away from its highs going back to the inception of the RVX in 2006.

So which one is right? Does the lower high in the RUT suggest that volatility traders are underestimating risk here? Or is the new low in volatility expectations a harbinger for an eventual new high in small-cap stocks? A few of the prior occurrences certainly came at inauspicious times for the RUT, including April 2011 and July 2015. But are those appropriate road maps to use?

In a premium post at The Lyons Share, we address these questions by taking a closer look at those previous occurrences in an attempt to come to an informed, quantitatively-backed conclusion. We also took a peek at small-cap volatility expectations from a different angle -- yielding very interesting results.

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#$IWM #$^RUT #$^RVX #$TWM #$RWM #$UWM

Small-Caps Vs. Volatility: Who Blinks?

Though the Russell 2000 is off its highs, its volatility expectations are hitting 52-week lows; which is correct?

A couple times in recent months (here and here), we have written posts pointing out odd behavior between the S&P 500 and the S&P 500 Volatility Index, a.k.a., the VIX. Since stocks and their related volatility indices typically move in opposite directions, it was odd to see the 2 moving in concert, even if it was just in the very short-term. Each time, we asked the question, “who will blink, the S&P 500 or the VIX?” As it turns out, arguably it was the VIX that blinked both times, eventually reversing course to a more conventional path given the direction of the S&P 500.

Today, we ask a similar question regarding the Russell 2000 Small-Cap Index (RUT), and the Russell 2000 Volatility Index (RVX). The impetus behind the question is the unusual set of circumstances currently present in the two data series. Specifically, The RVX recently closed at a 52-week low while the Russell 2000 was more than 2% off of its recent high.

That may not seem all that extraordinary. However, since the inception of the RVX in 2006, it is just the 6th unique time that the RVX has hit a 52-week low while the RUT was at least 1% below its 52-week high.

So what is the message being sent here? Judging by the prior events, there appears to be a clear favorite for who is most likely to blink.

See the “all-access” breakdown of this unusual and telling small-cap phenomenon -- as well as our complete macro market analysis every day -- at our new site, The Lyons Share.

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#$IWM #$^RVX #$^RUT #$TWM #$RWM #$UWM

Small Cap Volatility Hitting Historic Lows

If it feels like the stock market hasn’t moved in a few days, you’re not imagining things. With the long weekend approaching, it seems as though Wall Streeters (or their robots) packed up and departed for the mythological “Hamptons” days ago. As it pertains to the small caps, as represented by the Russell 2000, it isn’t merely pre-holiday low volatility, however. It is historically low, period. As measured by the Russell 2000 Volatility Index (RVX), volatility expectations for the small cap index have only been this low a couple of times since its inception in 2006.

As the chart reveals, there have been a total of 19 days since 2006 that the RVX has traded below 15. Most of them occurred within the following windows:

December 2006 & February 2007 (6 days): The Russell 2000 hit a short-term peak almost immediately, dropping 8% in about a week. It would recover and rally for 4 more months, making marginal new highs before forming its cyclical top.

January & March 2013 (10 days): The Russell 2000 was early into its 15-month, nearly straight-up rally. However, the index did struggle to gain much traction in the days and weeks following most of these readings.

March 2015 (2 days): The Russell 2000 hit a short-term peak immediately, dropping 3% in a few days before returning to its high.

It is difficult to make much out of this development with so few precedents. However, in the short-term, low readings in the RVX like this have not presented favorable times to be long. Even those times when the Russell 2000 did not immediately pull back (e.g., 2013), it still struggled to gain much ground in the near-term. On average following these readings, the maximum gain over the subsequent month has been +1.3% while the average drawdown has been -3.9%. So the short-term risk:reward setup is not attractive.

Longer-term, the limited precedents (not to mention, limited history) does not allow for any reliable conclusions. The Russell 2000 was able to rally for awhile following the 2013 occurrences. However, it ran into a cyclical top not long after the 2007 examples.

We will say -- and it’s no revelation -- that low volatility is a hallmark of market tops. That said, such low volatility can persist for some time. Witness the historic lows in the S&P 500 Volatility Index, VIX, in the mid-1990′s. The market went on to rally for several more years following that example. However, the norm is for low volatility to be more representative of tops.

Of course, volatility expectations can always go even lower. Looking historically, though, the rubber band is essentially as stretched to the down side as it has ever been. Therefore, if the RVX continues lower, it would be pushing a new lower bound on its all-time chart.

Lastly, one interesting aspect of today’s reading of the RVX is that it occurred despite the fact that the Russell 2000 is not at a 52-week high. Every other sub-15 occurrence in the RVX has come with the Russell 2000 at a high, or within 0.3% of one. What the significance of that is, we’re not sure. It may just have something to do with the impending long weekend.

What’s the ultimate takeaway? Considering the broad market is over 2 years into a rally without anything much in the way of a correction, not to mention 6 years into a cyclical bull market, the historically low volatility is certainly not a “buy signal”. As we said, the low volatility can persist for awhile. However, for stock bulls, that is a tougher road to hoe than it would be with volatility expectations higher. Therefore, at a minumum, the historically low volatility likely means a “hold” for stocks rather than a buy.

Have a great Memorial Day weekend. Please remember those who served and paid the ultimate sacrifice for our country.

The photo (source: U.S. Navy) is of the crew of the U.S. Naval Submarine, USS Thresher (SSN-593). The Thresher suffered an accident in 1963 during exercises that resulted in the loss of the boat and its entire crew. The 129 casualties represent the worst U.S. Naval submarine tragedy in history.

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More from Dana Lyons, JLFMI and My401kPro.

The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

#$IWM #$^RUT #$^RVX #Russell 2000 #Russell 2000 Volatility Index #$TWM #$RWM #$TNA #$TZA

Is the volatility spike over -- or just beginning?

Unless you have been in a bunker hiding from ebola, you've no doubt noticed the pick up in volatility across basically all asset classes. In the stock market, volatility has essentially doubled from the mid-summer extreme low levels. The rise has been enough to send the S&P 500 Volatility Index, a.k.a., VIX, to a 52-week high.

The question on everyone's minds now is whether the recent volatility spike has about run its course or if it's a sign of a shift in the market environment. A historical look at other times when the VIX made a new 52-week high for the first time in at least 6 months doesn't immediately clear things up. Here are the drawdowns (i.e., max losses) going forward in the S&P 500 after such new highs in the VIX.

A look at the drawdowns reveals a couple things. The average drawdown after 52-week highs in the VIX are much greater than the norm. However, the median drawdowns are mostly in line with the norm. What does this tell us? It suggests that more times than not, a 52-week high in the VIX is more reflective of extreme fear levels associated with a near-term market bottom. It also suggests, however, that on occasion, the new VIX high has been a warning sign of impending bigger losses. Therefore, we cannot analyze these 52-week VIX highs in a vaccuum.

A number of times when the VIX made a 52-week high, the S&P 500 bottomed almost immediately and went on to sizable intermediate-term gains. These dates include October 1997, October 1998, March 2001 and September 2001. These instances mostly occurred after more significant weakness than we've seen so far, in the S&P 500 anyway. The VIX was also significantly higher on those dates. In fact, it was at least 40 in each of those instances, double what it is today.

A few times the 52-week high in the VIX occurred during or just prior to waterfall-type declines such as in October 1987, September 2008 and August 2011. While the market may be in transition to more challenging times, it does not yet have the hallmarks of that type of a crash environment.

The remaining dates led to mostly nondescript returns going forward, in the short-term and intermediate-term. Many of them had other characteristics possibly similar to our present case. That is, a new 52-week high in the VIX, but coming from a low level. Such (perhaps) similar precedents include October 1989, March 1994, April 2000 and July 2007. One common thread among those dates is that they occurred during a period of transition from a low volatility environment to a higher volatility environment. The first two transitions led to higher volatility periods that were relatively short-lived, i.e., less than a year. The other two, of course, led to longer, more serious cyclical downturns.

While it is way too soon yet to determine the significance and ramifications of the current spike in volatility, historical precedents can give us a clue as to the more likely meaning behind it. An examination of those precedents yields the conclusions that we are likely neither at a launch point of a substantial rally nor at risk of an imminent crash-type move. Current conditions do suggest that we are perhaps entering a transition from the recent low-volatility period to a higher-volatility period, with the length and difficulty of such a period is yet to be determined.

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More from Dana Lyons, JLFMI and My401kPro.

#Volatility #Volatility Index #$^VIX #$^VXN #$^RVX #$SPY #$^GSPC #$DIA #$QQQ #$IWM

Small Cap Volatility Hitting Historic Lows

As the chart reveals, there have been a total of 19 days since 2006 that the RVX has traded below 15. Most of them occurred within the following windows:

March 2015 (2 days): The Russell 2000 hit a short-term peak immediately, dropping 3% in a few days before returning to its high.

Have a great Memorial Day weekend. Please remember those who served and paid the ultimate sacrifice for our country.

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More from Dana Lyons, JLFMI and My401kPro.

#$IWM #$^RUT #$^RVX #Russell 2000 #Russell 2000 Volatility Index #$TWM #$RWM #$TNA #$TZA

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