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THE OUTPERFORMANCE OF SMALL CAPS IS AT AN EXTREME

THE OUTPERFORMANCE OF SMALL CAPS IS AT AN EXTREME


TPA monitors the performance and relative performance of broad market categories in the TPA Risk Dashboard, which is provided to clients daily. Over the past 3 and 6-month periods, the Russell 1000 (Large Cap stocks) is up 14.08% and 28.78%, respectively, while the Russell 2000 (Small Cap stocks) has been up 40.92% and 57% in the same time periods. That means that Small Caps have outperformed Large Caps by 26% and 28% over the past 3 months and 6 months, respectively.

TPA has been recommending that clients buy Small Caps versus Large Caps since October 2020. In the 10/26/20 World Snapshot, TPA told clients that Small Caps should be bought, as they historically outperform when rates start to rise.


Small Caps and now at an extreme versus large Caps. These are large differences that deserve investors’ attention and the reason that TPA provides the Risk Dashboard to clients on a daily basis.


How extreme is the relative performance between Small Cap and Large Cap stocks? The first chart below shows the ratio of the Russell 1000/Russell 2000 (RIY/RTY) on a weekly basis since 2004. The Weekly RSI for RIY/RTY is 26, which is very oversold on a long-term basis. The chart shows each time RIY/RTY was at an oversold extreme, the course of the ratio reversed (Large Caps began outperforming Small Caps). Chart 2 shows that each of the 6 times from 2006 to 2019 that the ratio RIY/RTY became as oversold as it is currently, Large Caps went on to outperform Small Caps by between 7% and 42%. The lesson clients should take away is that this is not the time to be betting on Small Caps versus Large Caps.


One takeaway for clients can be seen in chart 3. Just because Small Caps may be at an extreme versus Large Caps, that does not point to a positive or negative future for stocks in general. Note that the S&P 500 has subsequently both sold off and rallied historically when RIY/RTY has been oversold.


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