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< BACK TO ALL REPORTS

Its soon or never for small-cap seasonal bounce

Jay Kaeppel
2025-01-21
The "inevitable" bounce in small-cap stocks relative to large-caps has remained elusive. Rather than throwing in the towel, aggressive short-term traders should be prepared for the possibility of one more favorable window for small-caps.

Key Points

  • Small-caps have a historical tendency to outperform from mid-December into mid-February of the following year
  • So far, small-caps have slightly lagged during this period - much as they have done in general for several years
  • Seasonality still favors small-caps in the weeks directly ahead

Small-caps have lagged - and continue to do so…

The chart below displays the performance of iShares Russell 2000 ETF  (ticker IWM) and SPDR S&P 500 ETF Trust  (ticker SPY) on an absolute basis (top clip) and relative basis (bottom clip).

For the record, the relative performance bottomed out at the end of June 2024. However, it would seem a reach to say that "the tide has turned" in favor of small-caps. 

…but there's still a chance for a solid small-cap bounce

In this article dated 2024-12-12, we highlighted small-caps' tendency to outperform large-caps from mid-December through mid-February of the following year. Small caps have continued to lag large caps during this period in 2024-2025 (large caps down about -1.2%, small caps down -3.2%).

But time is not up yet.

The chart below displays the annual seasonal trend for ticker IWM. The period from Trading Day of the Year #14 through TDY #32 is highlighted. For 2025, this period extends from the close on 2025-01-23 through 2025-02-19.

The chart below displays the hypothetical growth of $1 invested in the S&P 600 Small-Cap Index during the TDY #14 through TDY #32 period every year since 1953.

The table below summarizes the S&P 600 Small-Cap Index performance during this period.

Small vs. Large during this brief window

The chart below displays the growth of $1 invested in the S&P 500 Small-Cap Index and the S&P 500 Large-Cap Index.

The table below summarizes the performance of both indexes and the difference between them during this period.

What the research tells us...

Trying to pick the bottom in the small-cap vs. large-cap has been a fool's errand for some time now. On a trend-following basis, investors who focus on long-term trends should still focus on large caps. Nevertheless, aggressive short-term traders should remain alert for a potential opportunity favoring small-caps in the weeks directly ahead.

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