Small vs. Large Cap Performance: Impact on Next Day Trading

Here's a look at a relatively pure measure of large cap performance, the Major Market Index ($XMI), vs. a relatively pure measure of small cap performance, the S&P 600 ($SML). On Friday, we barely moved on XMI, registering a loss of -.07%. SML was stronger, rising .26%.

I decided to go back to March, 2003 (N = 765) and see how next day performance in the S&P 500 was impacted by previous relative performance in SML vs. XMI. I found 192 occasions in which XMI closed with a gain of less than .20% and a loss not greater than -.20%. The average next day performance in SPY was .07% (107 up, 85 down).

On narrow XMI days in which SML was strong (N = 96), the average next day gain was .10% (58 up, 38 down). On narrow XMI days in which SML was weak, the average next day gain was only .04% (49 up, 47 down). This is a pattern I have noticed before: smaller cap performance appears to lead that in larger caps. As long as SML outperforms XMI, short-term returns tend to be more favorable than when SML underperforms. I'll be taking further looks at these sectors in the near future.