There has been a good deal of rhetoric lately as to how small caps have underperformed badly recently.
On closer examination however small caps have actually performed right in line with historical seasonal patterns (yes, the magnitude of the moves have been greater) and they appear poised for their usual seasonal breakout which tends to begin in late-November, but does not fully get underway until mid-December.
The chart below taken from page 110 of the Stock Trader’s Almanac 2018 shows the one-year seasonal pattern of the ratio of the Russell 2000 (NYSEARCA:IWM)to the Russell 1000 from July through June to highlight the perennial low point of this relationship, November and the winter rally mentioned above.
We have added the performance of this ratio in 2018 so far through today’s close and updated the historical average pattern through June 30, 2018. While this year’s pattern has more amplitude, the trend is quite similar to the historical pattern. Small caps underperformed from late June through mid-August, then had the usual pre Labor Day rally, followed by a customarily weak October. It now appears that small caps could be setting up nicely for their season of outperformance.
For more on this historical seasonal pattern see pages 108 & 110 of the Stock Trader’s Almanac 2018 or on the same pages in the 2019 edition. The 2019 edition is now available for free with a subscription to our newsletter.