Small-cap surge coming to an end
In mid-August we noted that small-cap stocks tended to outperform large-cap stocks from around the 18th trading day of August until the 12th trading day of September. This certainly was the situation this year as the Russell 2000 index surged 4.8% from August 24 through yesterday’s close compared to a 2.8% gain by the Russell 1000 during the same time period. The Russell 2000 is still outperforming today, but there are signs that this trend could be coming to an end.
The first sign is the historical seasonal pattern highlighted in the above chart is on the verge of heading lower once again indicating that small-cap underperformance will return. Other headwinds to the continuation of the small-cap rally are Stochastic, relative strength and MACD indicators that are all in overbought territory (in the following chart). Russell 2000 is also sitting right around projected monthly resistance (red-dashed line). Stretched technical indicators at the end of a favorable seasonal period suggest that the bulk of the Russell 2000’s latest advance is most likely done.
