When Large Cap Stocks Outperform Small Caps

Over the last ten trading sessions, we've seen solid gains in the Dow Jones Industrial Average (DIA; up over 4%), but more muted gains in the small-cap Russell 2000 Index (IWM; up about 1.3%).

I went back to 2004 (N = 825 trading days) and found 81 occasions in which the Dow was up more than 2.5% in a 10-day period. When the Dow was up strongly and outperformed the Russell (N = 29), the next five days in the Russell (IWM) were up by an average of .66% (21 up, 8 down). On the other hand, when the Dow has been strong but the Russell has been stronger (N = 52), the next five days in the Russell (IWM) averaged a gain of only .05% (27 up, 25 down).

It thus appears that, when the Russell has underperformed a strong large cap Dow over a 10-day period, it has tended to play catchup over the following week. As I'm writing this (9:13 AM Monday morning), the Russell is continuing to underperform the large caps. I'll need to see some signs of selling drying up (rising NYSE TICK lows and negative TICK unable to push IWM to new lows) to act on this pattern.

It's when real-time action confirms historical patterns that particularly good things can happen.