Do the Small Stocks Really Matter?

One of the themes we'll be exploring on this site is the behavior of small stocks, medium cap stocks, and individual stock sectors relative to the large cap issues. Yesterday the S&P 500 declined modestly, but the Russell 2000 Index more than doubled the decline in percentage terms. I went back to January, 2003 and looked at occasions when the SPX declined, but less than half a percent on the day (N = 144). The next day, the SPX averaged a gain of .18%, with 90 occasions up and 54 down. This is consistent with our earlier theme of weakness following strength.

When I divided the sample for weak Russell days (N = 59; down more than half a percent) vs. strong Russell days (N = 85; down less than half a percent or up), a pattern emerged. The next day in the SPX following a weak Russell day was .09% (36 up, 23 down). Following a strong Russell day, the following day in SPX averaged .25% (54 up, 31 down). Clearly the bullish bias that normally follows a down day in the S&P is negated when, like Monday, the Russell underperforms the large caps.