Study: what happens next when small cap (Russell) leads the stock market


Small cap stocks (Russell 2000 Index) made a new all-time HIGH yesterday even though mid/large cap stocks (S&P 500) are still lagging. The S&P is still 5% below its all-time high.

The stock market has a medium term (2-6 month) bullish bias when the Russell 2000 makes its first new all-time high in a long time.
Let’s look at the specific cases in which the Russell 2000 made a new all-time high but the S&P 500 was still far below its all-time high. Here are the study’s parameters: what happens next to the stock market when…

The Russell 2000 made a new all time high.
This is the Russell 2000’s first all-time high in 3 months (63 trading days)
The S&P 500 is at least 4% below its all time high.

Here are the historical cases.

  1. January 2, 2013
  2. April 5, 2011
  3. November 14, 2006
  4. December 1, 2005
  5. July 8, 2005
  6. November 11, 2004

Here’s what happened next to the stock market (S&P 500).

January 2, 2013

After this signal occurred, the stock market rallied for another 5.5 months before starting a 6%+ “small correction”.

April 5, 2011

After this signal came out, the S&P 500 rallied for less than 1 month before starting a “significant correction” (which the Medium-Long Term Model predicted).
However, the stock market’s downside over the next 3 months was limited. The S&P mostly swung sideways over the next 3 months.

November 14, 2006

After this signal came out, the S&P rallied for another 3 months before starting a 6%+ “small correction”.

December 1, 2005

After this signal came out, the S&P rallied for another 5 months before starting a 6%+ “small correction”.

July 8, 2005

After this signal came out, the S&P rallied less than 1 month before starting a 6%+ “small correction”.
However, the stock market’s downside over the next 3 months was limited. The S&P mostly swung sideways over the next 3 months.

November 11, 2004

After this signal came out, the S&P rallied for another 4 months before starting a 6%+ “small correction”.

Conclusion

When small cap (Russell) led the stock market’s rally, the stock market’s downside over the next 2 months was limited. The stock market either swung sideways over the next 2 months or rallied higher.
The stock market’s performance after 2 months was more random.
Read Stocks on May 17, 2018: outlook

2 comments add yours

  1. Is there data from the 70’s/80’s and 90’s to do a similar compare? I would be curious to see behaviour from back then, when there were slightly different economic situations then in the 21st century so far.

    • I don’t know where to find this historical data, that’s why it’s hard to do the backtesting.

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