Small-Cap Stocks Eye Best Month Since Presidential Election

The Russell 2000 Index just notched a fifth straight record high

May 22, 2018 at 1:41 PM

Small-cap stocks have been on fire recently, with the Russell 2000 Index (RUT) notching a fifth straight all-time high today, peaking at 1,639.88 earlier. Amid its recent surge, the RUT broke north of a trendline that had marked lower highs in 2018, and took out its January all-time closing high at 1,610, which coincides with a round 10% above the February closing low. As such, the small-cap index is already up 6.3% in May -- set for its best month since November 2016. However, if history is any indicator, the RUT could take a short-term breather soon.

May Flowers Could Bring June Showers

If the RUT finishes May with a gain of 5% or more, the index could cool off in June, if past is precedent. Looking at data since 2010, when the RUT ended the month higher by 5% or more, it went on to average a gain of just 0.19% the following month, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. For comparison, the small-cap barometer averaged a gain of 0.75% the month after locking in a gain of 0% to 5%, and soared nearly 2%, on average, following a monthly loss of up to 5%.

RUT next month based in prior month

But RUT Could Finish 2018 Strong

Meanwhile, after the RUT notched a monthly win of at least 6%, it's averaged a next-month return of just 0.67%, looking at data since 2010. That's about half of its average anytime one-month return of 1.12%.

Nevertheless, the index has tended to outperform three and six months after a monthly gain of 6% or more. Specifically, three months out, the RUT was up another 4.67%, on average. Six months out, the index was higher by 8.87%, on average. Plus, the RUT was in the black 85% of the time in both instances. For comparison, the small-cap index averages three- and six-month gains of just 3.08% and 6.19%, respectively, looking at anytime data since 2010. Also noteworthy, the average six-month loss after a monthly gain of 6% is just 0.56%, compared to 6.92% anytime.

RUT after 6 percent monthly gain

In conclusion, should the Russell 2000 Index maintain its healthy May lead, small-cap stocks could catch their breath in June, if past is prologue. However, history also indicates the RUT could resume its outperformance in the second half of 2018.

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