Small-Caps Could Be Emerging As New Leaders

After underperforming the S&P500 for most of last year, the Russell2000 is approaching an important breakout level relative to its large-cap counterparts. Here is a daily ratio chart of the Russell2000 ETF $IWM vs the S&P500 ETF $SPY. Late last year, the ratio broke above its downtrend line from the highs last year. The next step is to start to put in higher highs. A break above the January highs would confirm that.

What does this mean? Bigger picture it’s hard to take outperformance out of the “riskier” smaller-cap names as a bad thing. If there is real risk appetite out there for US Equities, we want to see money flowing into small-caps at a faster rate than into the less volatile, larger-cap stocks.
Aside from the broader market implications, a pair trade where one short the S&P500 in equivalent nominal amounts to being long the Russell2000, a breakout above this resistance would trigger that opportunity. Risk management-wise, I see no reason to be in this particular pair trade if the ratio is below the late January highs.
This is an interesting chart to watch. I came into the year looking for small and mid-cap stocks to outperform the large-caps. So far we are seeing this outperformance as we close out the first quarter. Moving forward, a breakout here would confirm this trend is likely here to stay.
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