Monday, February 13, 2006

Small and Midcap Stocks - Relative Performance

This is the first of my attempts to carefully separate out the small and mid cap universes by comparing the S&P 400 small caps ($SML) to the S&P 600 mid caps ($MID). I went back to March, 2004 (N = 482) and found 77 occasions in which SML was down by more than 1%--as was the case on Monday. I then investigated whether the relative performance of MID vs. SML had any impact on future short-term performance.

When SML has been down by 1% or more (N = 77), the next day in SML has averaged a gain of only .01% (41 up, 36 down). This offers no edge relative to the sample overall, which averages a gain of .06% (267 up, 215 down).

I then broke down the weak SML days in half based on MID performance. When SML was much weaker than MID (N = 38), the next day in SML averaged .20% (24 up, 14 down). When MID showed greater relative strength (N = 39), the next day in SML averaged a loss of -.18% (18 up, 21 down).

On Monday, SML was weak relative to MID, but not by a huge margin. Interestingly, it appears that, although SML and MID are highly correlated, relative weakness among the smallest stocks during a decline leads to a reversal, while relative strength leads to further weakness.

Because the Russell 2000 Index has components of both small and midcap issues, a differentiation of these might be helpful in predicting ER2 performance. That will be an upcoming project.