Study: What Happens Next When Small Cap (Russell) Leads The Stock Market
Small cap stocks (Russell 2000 Index) made a new all-time HIGH yesterday even though mid/large cap stocks (S&P 500) are still lagging. The S&P is still 5% below its all-time high.
This chart demonstrates that the stock market has a medium term (2-6 month) bullish bias when the Russell 2000 makes its first new all-time high in a long time.
Let’s look at the specific cases in which the Russell 2000 made a new all-time high but the S&P 500 was still far below its all-time high. Here are the study’s parameters: what happens next to the stock market when…
The Russell 2000 made a new all time high.
This is the Russell 2000’s first all-time high in 3 months (63 trading days)
The S&P 500 is at least 4% below its all time high.
Here are the historical cases.
- January 2, 2013
- April 5, 2011
- November 14, 2006
- December 1, 2005
- July 8, 2005
- November 11, 2004
Here’s what happened next to the stock market (S&P 500).
January 2, 2013
After this signal occurred, the stock market rallied for another 5.5 months before starting a 6%+ “small correction”.
April 5, 2011
After this signal came out, the S&P 500 rallied for less than 1 month before starting a “significant correction” (which the Medium-Long Term Model predicted).
However, the stock market’s downside over the next 3 months was limited. The S&P mostly swung sideways over the next 3 months.
November 14, 2006
After this signal came out, the S&P rallied for another 3 months before starting a 6%+ “small correction”.
December 1, 2005
After this signal came out, the S&P rallied for another 5 months before starting a 6%+ “small correction”.
July 8, 2005
After this signal came out, the S&P rallied less than 1 month before starting a 6%+ “small correction”.
However, the stock market’s downside over the next 3 months was limited. The S&P mostly swung sideways over the next 3 months.
November 11, 2004
After this signal came out, the S&P rallied for another 4 months before starting a 6%+ “small correction”.
Conclusion
When small cap (Russell) led the stock market’s rally, the stock market’s downside over the next 2 months was limited. The stock market either swung sideways over the next 2 months or rallied higher.
The stock market’s performance after 2 months was more random.