Taking a look at the historical record of the RUT index
Just over a month ago, I discussed how small-cap stocks were significantly underperforming compared to large-cap stocks. Now, small caps are making a major comeback. Over the past five trading days, the small-cap Russell 2000 Index (RUT) has surged more than 11%, while the large-cap S&P 500 Index (SPX) has risen just over 1.5%.
The five-day relative strength (RS) of the RUT compared to the SPX is 1.096, a level reached only once since 1979. Despite this impressive rally, the SPX still outperforms the RUT over the past 52 weeks by nearly nine percentage points (25.8% to 17.1%). Let’s look at the historical record to see what all this means for stocks going forward.
A Look at Historical Data
The table below lists the dates that RUT five-day relative strength reached 1.06 (I only show one signal every 12 months). The highest level ever was October 19, 1987, known as Black Monday, when the SPX fell over 20% in one day. Other than that outlier, yesterday’s reading of 1.096 was the highest ever.
These tables summarize the SPX and RUT returns following those dates listed above. It’s only six data points, but these were outstanding times to buy stocks. The S&P 500 averaged a 4.9% return over just the next two weeks with a median return of 3.4%. Over the next six months, both indexes averaged double digits with five of six returns being positive.
I find the recent spike in small cap stocks interesting given the longer-term underperformance of those stocks. So, looking back at the data since 1979, I found seven times that the RUT had a five-day RS of over 1.04, but a 1-year relative strength of less than 0.95. The tables below summarize the returns of the SPX and RUT after those signals. Again, it’s not a lot of signals, but when investors have flooded into small-caps after a year of them underperforming large-caps, it tended to precede an extremely strong stock market.
All seven times, the S&P 500 was higher across all time frames below from two weeks to a year. The index averaged a return of 11% three months later and almost 23% over the next year. Small-cap stocks averaged a higher return showing 13% over the next three months and 25% over the next year with six of seven returns positive.
For those curious to see those specific signal dates and subsequent returns, that information is below.
