Monday, April 30, 2007

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.


Stevesm said...

Hi Dr Brett,

I am interested in knowing what happens in these 8 down occasions, in terms of their magnitudes. Thanks.


Will Rahal said...

I believe that this the beginning of superior relative performance by Large vs. Small caps
The P/E of the Russel-2000 is 41 vs. 17 for the SP-500. Interestingly, Wall Street analyst favor
Small vs. Large caps by a 1.5 ratio.This leaves more room for a disproportionate number of "downgrades" affecting the Small caps. Take a look at my blog:
Under Small caps vs Large caps

Brett Steenbarger, Ph.D. said...

Hi SteveSm,

Unfortunately I don't have those data handy. I know the 8 occasions did not stand out as unusually large. Thanks--


Brett Steenbarger, Ph.D. said...

Hi Will,

Thanks for the perspective and link--


Andres Ceballos said...

Thanks, Brett from Bogota - Colombia, great recommendations in you Blog and web page.

You are very welcome to visit me at

I love trading

Brett Steenbarger, Ph.D. said...

Thank you very much for the note and the link, Andres!