Small Caps Strongly Outperforming

Jun 4, 2008: 9:54 PM CST

For those of us who mainly follow the “Big Three” US Stock Market Indexes, you might be surprised to find that the Russell 2000 – Small Cap Index – has outperformed the S&P and Dow Jones, and is closer in recent performance to the NASDAQ.

Let’s see the Russell’s recent dominance:

I’m showing the actual price performances of the S&P 500 (blue) and Russell (Red and Black).  Notice how the two major US Stock Market indexes have tracked extremely closely throughout most of 2008, but what’s starkly evident is how the two indexes have diverged sharply since mid-May.

The most recent price swing in the Dow and S&P have made a lower high, while the Russell has made a higher high, and could be on track to make new highs for 2008!  Who saw that coming?

The Dow has performed poorly in comparison as well (not shown on these charts).

Let’s take a quick look at the amazing strength of the Russell 2000:

Price closed higher today, but is trapped starkly between the rising 20 and the falling 200 period moving averages.  Where will price break next?

Momentum essentially is flat, and when price swings are so narrow as they are in the index, the momentum oscillator is essentially useless for analysis purposes (of momentum highs, lows, or divergences).

It will be interesting to watch whether price surges above resistance or breaks beneath its support zones, and what that might mean for the ‘main’ stock market indexes.

Keep your eye on this most interesting development.

5 Comments

5 Responses to “Small Caps Strongly Outperforming”

  1. trendie Says:

    Notice it for a couple of weeks. My theory is that eventually all major indexes will re-align – either the big caps will pull down the small guys, or vice versa. What’s your take?

  2. Anonymous Says:

    Certainly keep us alerted to what you view here. Fundamentally it doesn’t really make sense, as most people were attributing the SPY components recent rise with their 40% oversees exposure. And in theory the Rus 2000 was more small cap based, and perhaps less exposed to the oversees growth mkt. But the charts seem to not exhibit this.

    Either way, I am playing a sideways mkt in IWM, between 69 and 77

  3. Corey Rosenbloom Says:

    Trendie,

    I’m a little confused as to why this is happening. I interpret that there is a bearish, defensive posture out there but these data contradict that. In defensive times, fund managers typically stay in the safety of the Blue Chips (Dow Outperforms) while selling (avoiding) Tech and Small Caps.

    Perhaps what we’re seeing is underlying strength and optimism about the market and the economy that isn’t perceived elsewhere (easily).

    It’s an interesting and (for me) unexpected development that I’m going to research more closely.

  4. Corey Rosenbloom Says:

    Anon,

    I’m with you in that it doesn’t make sense – or that it’s difficult to comprehend on the surface.

    I suspect that a rising dollar helps Small Caps and hurts large multi-nationals (conversion back to dollars) and so this could be a factor, in anticipation (or materialization) of an emerging stronger dollar and what that might mean, but otherwise I’m a little stumped at the moment.

    I’ll update when I find a solution and would be happy to hear from readers as to their thoughts.

  5. Anonymous Says:

    I guess the small guy is able to pull the biggies up.