The Small Cap Out-Performance Gap is Closing

Andrew Kassen

“Small cap stock out-performance brings excellent opportunities as a function of most mature bull markets; and often characterizes the fantastic – if abruptly concluded – end-run of major legs in those markets.”

What the Current Small Cap Outperformance Means, See It Market on 10/01/13

Bloomberg published a thought-provoking piece worth a read on the small cap out-performance this morning: Small-Caps Double Dow in Signal Economy Gaining Speed.

The “Small cap out-performance as a barometer of domestic economic health” thesis presented in the article is established, but interesting and credible and a great reminder of what geographical exposure (concentration/diversification) says about relative leconomic strength – and how it can materially impact a portfolio.

However: this observation is more than a bit late: to wit, the smallest US companies have been outperforming the largest by a staggering margin over the last year.

A fortiori, notice the hilariously under-performing Mega bar over the last year (at bottom).  In broader terms, this is borne out by the outperformance of the Russell 2000 (RUT – Small Cap) to the Dow Industrials (DJIA– Large Cap) +32.2% to +19.9% open-to-peak year-to-date.

Now look at 6 months. 3 months. 1 month.  As covered elsewhere on See It Market, this bottom-up to top-down market cap regime continued into last week, as well.

The general Small Caps > Large Caps theme has persisted all year; but its momentum has also deteriorated all year – a dynamic that has been obscured by just how dramatic the relative out-performance has been up to this point.

Market cap leadership may flip back to bottom up at any time; but the year-long trend has been in the opposing direction – with no sign of slowing down. If the trend gains in intensity, the RUT/SPX ratio – currently at all-time highs may turn over – an event that correlates well with tops – local and cyclical – in the wider market.

By this token, Bloomberg’s thesis is worthwhile; just quite a few months late to-print.

Twitter: @andrewunknown and @seeitmarket

Author holds net short exposure to Russell 2000 at the time of publication.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

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