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Large Caps Underperformance vs. Small Caps is Bullish for Stocks

Commodities / Gold and Silver 2018 Aug 16, 2018 - 09:12 AM GMT

By: Troy_Bombardia

Commodities

As you probably already know, large cap stocks (Dow Jones index) have underperformed small cap stocks (Russell 2000 index) in 2018.


Here’s the Dow:Russell ratio. Notice how this ratio fell for 5 months in a row from February – June 2018 (i.e. Dow underperformed the Russell for 5 consecutive months).

This is a medium-long term bullish sign for the U.S. stock market. Persistent underperformance from large caps only happens during bull markets.

Large caps tend to outperform during bear markets or at the very top of bull markets. This is because large cap stocks are defensive stocks while small cap stocks are riskier stocks. Investors tend to shift into defensive stocks during bear markets. Hence, large caps (Dow) fall less than small caps during bear markets.

The Dow Jones has underperformed the Russell 2000 for 5 consecutive months from February-June 2018. Here’s what happens next to the S&P 500 when this happens (historically).

Here’s what happens next to the Dow when the Dow underperforms the Russell for 5 months in a row.

Here’s what happens next to the Russell when the Dow underperforms the Russell for 5 months in a row.

Click here to download the data in Excel

Conclusion

As you can see, the U.S. stock market tends to go up in the medium-long term after large caps (Dow) consistently underperforms small caps (Russell 2000).

Click here for more market studies

By Troy Bombardia

BullMarkets.co

I’m Troy Bombardia, the author behind BullMarkets.co. I used to run a hedge fund, but closed it due to a major health scare. I am now enjoying life and simply investing/trading my own account. I focus on long term performance and ignore short term performance.

Copyright 2018 © Troy Bombardia - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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