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Are Small Caps Burning Out or Fading Away?

Small cap stocks as measured by the Russell 2000 have seasonal “Best 8 Months” that begins in November and ends in June, much like the NASDAQ’s Best 8 Months, both are longer than DJIA’s and S&P 500’s Best Six Months.

As you can see in the chart below from page 110 of the Stock Trader’s Almanac 2017, the “Small Cap Effect,” née January Effect, shows small cap stocks begin to outperform large cap stocks in earnest in mid-December. Though they hold the lead through the beginning of June when their bullish season ends, though the bulk of the move is complete by early March.

This has once again been the case here in 2017. In the final chart below of the Russell 2000 compared to the S&P 500, it is clear that since late-February R2K has underperformed S&P. Today was no exception in the Fed-minutes-fueled, late-day selloff. While the overall market is still expected to make another move higher before any Trump Tumble transpires, small caps are likely to just keep pace with large caps at best.