Stocks quoted in this article:
As I'm sure you're well aware, 2014 has seen a bit of a cratering in small caps, particularly on a relative basis. Here's the iShares Russell 2000 ETF (IWM) versus the SPDR S&P 500 ETF Trust (SPY) so far in 2014:
The question is, of course, what this means going forward.
Well, here's a scary thought. We saw a similar pattern back in 2007. Here's how the 2007 IWM vs. SPY chart looked into early October of that year.
Not identical -- but pretty close. Thirteen and a half months later, SPY bottomed at about half the levels of October 2007.
So, sell everything! This proves that small caps are leading us to oblivion.
... but wait, don't load up on those CBOE Volatility Index (VIX) derivatives just yet. Here's how the same ratio looked in the first nine months of 2011:
That pattern looks familiar, too. But guess what? If you went long SPY at the end of September 2011 and held for a year, you earned about 30%. And we're up about another 40% in the two years since then. So, maybe small-cap underperformance isn't such a bad sign after all.
Truth is, there's just no way to know. The only point I'd like to re-emphasize is not to draw any conclusions from sample sizes of one or two.
The market looks really awful lately, no matter where you look. And volatility keeps on keeping on, though not really getting to extremes. That's not a great sign, either ... I'd rather see a panic over-reaction to what -- so far -- isn't a big stock sell-off, in percentage terms.
But we can't always get what we want.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.