Small cap stocks have been outperforming large cap stocks, and for good reason. Small cap stocks will be less badly hurt by Trump’s trade war.
The Dow (large cap index) has fallen 5 days in a row while the Russell 2000 (small cap index) has gone up 3 out of the best 5 days.
Here are the historical cases in which the Dow Jones fell 5 days in a row while the Russell 2000 went up 3 out of the past 5 days (i.e. divergence). Then let’s look at what happened to the Russell, Dow, and S&P.
Here’s what happens next to the Russell.
Here’s what happens next to the Dow.
Here’s what happens next to the S&P 500.
Here’s which index outperforms the most in the future.
Click here to download the data in Excel.
This supports a previous study, which suggests that the Russell 2000 (small caps) will continue to outperform in the next few months.
As we can see in today’s study, the stock market (all 3 indices) usually goes up over the next 2 weeks – 3 months, which suggests that any short term downside the stock market experiences right now will be limited.
Remember this study: when the Russell outperforms like it has recently, the stock market’s 6 month future returns are extremely bullish.
I agree with this study’s conclusion. Trump has gone nuclear in his trade dispute with China. Small cap domestic stocks have less to lose than large cap international stocks from this trade dispute.
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