Struggling Small Caps Could Signal SPX Strength

The relative strength gap between the RUT and SPX usually signals gains ahead

Senior Quantitative Analyst
Oct 25, 2023 at 8:28 AM
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The chart below shows the large-cap S&P 500 Index (SPX) alongside the small-cap Russell 2000 Index (RUT), going back to 2021. As you can see, the RUT has vastly underperformed the SPX, sitting at a 52-week low, while the SPX is closer to its 52-week high than its low. This week, I will explore past instances when the RUT has performed poorly relative to the SPX and see what has tended to happen next.

SPX RUT

Small Caps in a RUT

We have data on both indexes since 1980. There have only been three other times that the RUT was at a 52-weeek low while the SPX was closer to its high than low. I wanted to see if the small caps dragged down the big caps, or if the big caps would lead the small caps higher in these instances. The table below shows how the big cap SPX performed after each of these signals. Unfortunately, it’s a completely mixed bag. The last occurrence was in January of 2022. Stocks struggled over the next year. There was another signal in October of 2014, in which stocks initially moved higher, gaining over 5% over the next month, but then struggled going forward so that a year after that signal the SPX was up only 4.5%, The first time it happened was in August of 1998. The index gained over 20% over the next year but the tech bubble popped not long after that.

SPX High RUT Low

And below, I have the RUT returns after these dates. The RUT performed better than the SPX after the 2014 signal but significantly worse after the 1998 signal. The returns after the most recent signal in 2022 were like those of the SPX. If we’re trying to find a tendency, this has not been much help.

RUT Low SPX High

Relative Strength Strengthens SPX

Here’s another way I looked at it. The one-year relative strength of the RUT to the SPX is 0.85. We get nine prior occurrences when we look at this way, at least that’s more than what we got above. It was good news going forward with the S&P 500 gaining almost 20% on average over the next year with eight of nine returns positive. The SPX outperformed typical market returns at each timeframe except the short-term (one-month returns).  

SPX RUT RSI

The returns of the RUT after these signals were similar to the SPX returns. Hopefully, this trend we’ve seen in the past stays true.

RUT SPX RSI

 

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