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Is It Time To Rotate Into Small Cap Stocks?

In 2017, the small-cap iShares Russell 2000 ETF (IWM) was up 14.60%, following a 21.60% gain in 2016. By comparison, the Spyder Trust (SPY) was up 21.6% in 2017, as the large caps outperformed the small caps by 7 percentage points for the year. However, in 2016, SPY was only up 12% for the year, an increase that was 9.6 percentage points less than the gains in IWM.

Many analysts, myself included, thought the small caps might do better in 2018, but as of Tuesday’s close, the SPY is up 1.7%, while the IWM is down 1.38%. However, a look at the charts this week indicates that now might be the time to rotate into small-cap stocks.

Tom Aspray -


During the bull market from late 2002 through 2007, the small-cap Russell 2000 led the S&P 500 by a wide margin. At the July 13, 2007 high, the Russell 2000 was up 148%, while the S&P 500 was up 85.8%. This is a difference of 62.2 percentage points from the October 2002 low.  The chart also reveals that corrections during the bull market were much sharper in the small cap Russell 2000.

For example, during the correction in early 2005 (point 1), the Russell 2000 dropped 21%, while the S&P 500 just lost 11%.  The disparity was even more pronounced during the decline from May-July 2006 (point 2), where the Russell 2000 declined 32.5%, but the S&P 500 was just down 11%.

In July 2007, both the S&P 500 and the Russell 2000 made new highs, followed by another correction. After that correction, the S&P 500 made a new high in October, while the Russell 2000 failed to reach its high from July. While the chart support in the Russell (line a) was broken in November 2007, the corresponding support in the S&P 500 (line b) was not broken until January of 2008.

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