Info!! Underperformance Of Russell 2000 Pocket-Size Cap Stocks: What Does It Mean?

A set out of people bring been focused on the relative underperformance of modest cap stocks versus large caps.  Indeed, piece the Dow Jones Industrial Average (DIA) touched novel highs this by week, the Russell 2000 Index (IWM) was trading almost multi-month lows.  Particularly weak bring been microcap shares (IWC).

As nosotros tin come across from the nautical chart above, tracking 100-day relative forcefulness of the Russell 2000 in addition to S&P 500 Indexes since 2000, it is non at all odd for the smaller caps to give-up the ghost through extended periods of underperformance.  While the electrical flow relative human relationship is oversold, it is non at the extremes nosotros witnessed inward May, 2011; October, 2008; or May, 2002.  Interestingly, those really oversold points inward the relative human relationship ended upwards heralding really expert long-term buying opportunities for stocks.

If nosotros simply await at 100-day periods of relative outperformance versus underperformance of the Russell 2000 Index, what nosotros uncovering is that frontward returns for both Russell in addition to S&P bring been superior next modest cap underperformance largely due to the influence of the to a higher house 3 instances.  Occasions when nosotros bring been at points of Russell underperformance similar to the electrical flow grade include March, 2004; April, 2006; April, 2010; in addition to March, 2012.  Those were corrective periods--but non necessarily precise marketplace lows--that ended upwards beingness expert times to last long stocks for the longer term.  Similar occasions likewise include March, April, July, in addition to Oct of 2007--a menstruation when stocks were topping out longer term.

Bottom draw of piece of job is that:  a) the underperformance of Russell 2000 stocks has tended to hap during corrective marketplace periods; b) such periods bring oftentimes led to superior longer-term returns; in addition to c) underperformance similar to electrical flow levels tin give-up the ghost greater underperformance during truthful acquit markets earlier they atomic number 82 to superior returns.  Given that the electrical flow underperformance is occurring inward a depression VIX environment, it is non clear to me that nosotros are witnessing a repeat of 2011, 2008, belatedly 2007, or 2002.  The underperformance of modest caps has non been a precise timing mensurate for stocks but on average has occurred during periods of guide a opportunity aversion that bring yielded positive frontward returns for investors over the medium term. 

Further Reading:  Risk Aversion inward 2006
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