What Small-Cap Underperformance Could Mean for Stocks

The last time the RUT was down double-digits over a three-year period while the SPX was positive was May of 2000

Senior Quantitative Analyst
May 3, 2023 at 8:00 AM
facebook X logo linkedin


Small-cap stocks have been underperforming substantially compared to big-caps over the past few months. The large-cap S&P 500 Index (SPX) has been around breakeven since the end of January, while the small-cap Russell 2000 Index (RUT) is down just over 10%. The last time the RUT was down double-digits over a three-year period while the SPX was positive was May of 2000, was just before the tech bubble burst leading to a two-year bear market. This week, I’m looking at how stocks have performed going forward depending on the performance of the RUT compared to the SPX.

IotW May

Small Cap Relative Strength

The chart below shows the SPX along with the three-month relative of the RUT. The relative strength has collapsed to below 0.9. This suggests investors are becoming more risk-averse, selling off riskier stocks in favor of steadier big-cap names.

IotW May 2

Going back to 1990, I found how the S&P 500 performed going forward based on the three-month relative strength of RUT to the SPX. The table below shows the returns over various time frames. The first row corresponds to the current situation, when small caps underperform big caps by a lot. Specifically, it’s when the relative strength reading is been between 0.79 and 0.96. The middle row is when the indexes perform similarly. Then the bottom two rows are when small caps outperform vs. big caps.

If the small cap underperformance indicates investors are becoming risk-averse, then this has been a good contrarian indicator. The S&P 500 had the highest average return going forward when big caps were outperforming over the prior three months. The index has averaged double-digit returns over the next year when small caps underperformed the big caps. When small caps have outperformed the most, the S&P 500 has averaged 5.5% over the next year. This tendency also exists at shorter time frames.

IotW May 3

Here’s a similar table showing the returns of the Russell 2000 going forward. The conclusion is the same for the small cap index. When small caps underperform over a three-month period, stocks tend to do well going forward.

IotW May 4

I did the same analysis as above except I limited it to times when the S&P 500 was up or down no more than 2.5% over the previous three months. This prevents the groups from being skewed by results that occurred in an extreme market environment. The tables below reach the same conclusion as the ones above. When small cap stocks underperformed big caps over a three-month period, stocks in general tended to do well going forward.

IotW May 5

 

Target Effortless Triple-Digit Gains Every Sunday Evening For Life!

This is your chance to triple your profit potential on Sunday evenings, without spending all your free time watching the market.

On Sundays, as a Weekend Plus subscriber, you’ll get up to 6 trades every Sunday, each targeting gains of 200% or more.

Start targeting gains like the ones our subscribers have seen recently, including:

213.3% GAIN on AutoNation calls
100.0% GAIN on Monster Beverage calls
100.4% GAIN on Walgreens Boots Alliance puts
100.4% GAIN on ON Semiconductor calls
257.7% GAIN on Dell calls

101.0% GAIN on Apollo Global Management calls
103.6% GAIN on JP Morgan  Chase calls
105.3% GAIN on DraftKings calls
101.3% GAIN on Airbnb calls
203.0% GAIN on Shopify calls
102.0% GAIN on Cboe Global Markets calls
100.9% GAIN on Boeing calls
102.1% GAIN on Microsoft puts
102.3% GAIN on First Solar calls
101.5% GAIN on PulteGroup calls
101.0% GAIN on Apple calls
209.4% GAIN on NXP Semiconductors calls
100.8% GAIN on Uber Technologies calls
100.4% GAIN on Academy Sports and Outdoors puts
102.2% GAIN on Trade Desk calls
100.8% GAIN on DoorDash calls
100.0% GAIN on Camping World Holdings puts
100.0% GAIN on Cboe Global Markets calls
100.2% GAIN on C3.ai calls
238.5% GAIN on Oracle calls

 
 
 


 
 

Rainmaker Ads CGI