The Small-Cap Stock Signal Not Seen Since 2011

While the Dow Jones Industrial Average (DJIA) is loudly assailing all-time highs, the Russell 2000 Index (RUT) -- the benchmark for small-cap stocks -- just wrapped up its longest winning streak since July. The index has rallied roughly 8.2% in the past five sessions, marking the biggest surge since December 2011, when the RUT soared 10.34% in a week, according to Schaeffer's Senior Quantitative Analyst Rocky White. Below, we'll take a look at how the RUT has performed after previous quick-and-dirty rallies, and if small-caps have rallied too far, too fast.

Prior to today, the RUT had gained 6.51% in four sessions, marking a feat not accomplished since September 2010, when it soared 7.3%. After the last rally of more than 6% in a four-day stretch, back in July, the RUT went on to gain 3.94% over the next month. In fact, the RUT has subsequently generated significant one-month gains following five of the last six similar rallies, with June 2010 the exception. Going back to July 2009, these four-day advances have gone on to result in an average one-month return of 4.15% for the small-cap barometer (though this is based on a small sample size).

However, when you look at times the RUT has rallied for five straight days, the returns aren't nearly as impressive. Since July 2009, there have been 24 winning streaks of at least five days, and the RUT has averaged a subsequent one-week loss of 0.5%, and a one-month return of just 0.21%.

When the RUT has rallied at least 8% in five sessions -- whether that was five consecutive wins or not -- the index has gone on to average a one-week loss of 1.69%, going back to July 2009. Looking one month out, the RUT has dropped 1.29%, on average, following these signals. For comparison, the RUT averages a one-month anytime return of 0.84%, going back to 1980.

 

In conclusion, the Russell 2000 Index (RUT) tends to outperform following big-time four-day rallies, but underperform its anytime returns after five-day winning streaks and/or jumps of 8% or more in a five-session span. Whether or not the small-cap index missed its "sweet spot" and rallied too far, too fast may be evident once we get a look at the one-week returns.

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