Like Tech Stocks, Small-Caps Plunge to Relative Lows
Tech stocks have been struggling. Another area of risk appetite, Small-Cap stocks, have struggled right along with them.
On Wednesday, we saw that the ratio of the Tech sector to the S&P 500 has sunk to nearly its lowest level in a year. While not as extreme, a ratio of Small-Cap stocks to the S&P has just dropped to a 4-month low.
A MEDIOCRE MEDIUM-TERM SIGN
This is a quick pullback in the appetite for riskier, or at least higher-beta, stocks - headlines were trumpeting all-time highs in the S&P 500 just a few days ago.
Other times when the S&P was recently at a 52-week high, then the ratio of Small-Cap stocks to the S&P plunged to at least a 4-month low, it preceded returns about in line with random for the S&P. Its returns were mediocre over the short- to medium-term with risk that was higher than reward up to 3 months later.
Over the past 30 years, there was less of a tendency to see weakness, especially over the next 6-12 months. But the last 4 signals all preceded losses over the medium-term.
For Small-Cap stocks, it was a similar story but with modestly weaker returns.
SMALL-CAP RELATIVE WEAKNESS CONTINUED
Like we saw with Tech stocks, this relative weakness in Small-Caps suggested that the trend would continue. The ratio between the two kept sinking in the months ahead.
Across almost all time frames, Small-Cap stocks continued to underperform their larger-capitalized siblings. Over the past 30 years, the only time that Small-Caps completely reversed course and resumed strong leadership was in 2013. The other 11 signals all preceded either losses or minimal gains in this ratio.
At some point, we'll likely see some oversold types of indications in these stocks, either on an absolute basis or relative to other indexes. There aren't many signs of that yet.