Both the Russell 2000 and Nasdaq-100 had strong weeks last week respectively rising over 1.5% and 2.0%. This compares to a 1.25% gain for the S&P 500. Despite their underlying markets outperforming the S&P 500, both VXN and RVX did not drop as much as VIX for the short week. I always believe there is a ‘why’ when this sort of thing happens and I have different theories on the whys for each. In the case of VXN, we are coming up on earnings season which results in an increase in the implied volatility of options on individual stocks. When you have an index like the NDX where 10% of the stocks represent almost 50% of the price action in the index you would expect to see implied volatility stay a little elevated and that may be why VXN was down about 5.5% last week while VIX lost over 8%.
The RVX story is a little different, but has been repeated in this space almost weekly for most of 2014. Despite the strong week, the Russell 2000 is still underperforming the other broad based market indexes this year. RVX dropped 0.50 or 3% last week even though the underlying market was much higher.
Looking at the curves, everything moved in sync. However, take a close look as the little bump for the VXN July futures relative to the shape of the RVX curve. I’m attributing the ‘bump’ to earnings which will be the daily headline starting in a little over a week and last into the end of July.