Study: what happens next when small cap outperforms large cap on a DOWN day


Small cap continues to outperform large cap stocks. The large cap Dow index fell -1.58% today while small cap Russell 2000 Index fell -0.23%.

This is uncommon because small cap tends to be more volatile than large cap. Small cap often falls more than large cap on a day when stocks fall.
Here are all the historical cases, and what happens next to the S&P 500 When:

Dow falls at least 1% more than Russell 2000, AND…
Both indices fall less than 3%, AND…
The S&P 500 is above its 200sma (i.e. the stock market is in an uptrend)

*We inserted the rule “Both indices fall less than 3%” because you cannot lump these cases together with cases in which e.g. Dow fell -8% and Russell fell -7%. Dow massively underperformed Russell yesterday as a multiple.

Click here to download the data in Excel.

Conclusion

Notice how many of these historical cases happened in the late-1990s. That’s due to the dot-com bubble. Large cap Dow frequently underperformed smaller cap indices because investors shunned “Old Economy” non-tech stocks.
If you solely look at the historical cases that happened after the dot-com bubble (i.e. after year 2000), you’ll notice that there is no consistent bullish or bearish pattern. Small cap Russell outperforming large cap Dow is neither a bullish nor bearish sign for the stock market.

2 comments add yours

  1. Hi Troy,
    Thanks for all the analysis you provide us. Would you be able to comment on the theory between stocks rising on very low volume (Today where the SPY gained 4$ on just 40M shares traded) vs stocks rising the same amount with super high volume (80M+ shares). Whats the logic behind them and which one is a bullish / bearish indicator.
    Jasen.

Leave a Comment