Small caps wash out and large caps win
Key points
- The Small Cap / S&P 500 Relative Ratio Rank collapsed from above 95 to below 15, completing the cycle in one month
- The broad signal saw SPX higher 83% of the time a year later, averaging a 10.6% gain
- Tightening for speed produces 9 signals, SPX was higher a month later every single time, while RUT lagged
- Extreme small-cap washouts favor large caps, not the beaten-down small caps
One indicator just did something
Small Cap / S&P 500 Relative Ratio Rank went from the top of its range to the bottom, above 95 to below 15, in 21 trading days. The rank closed at 10.74 on Monday, with the S&P 500 at 7,403. Small caps have been routed relative to large caps, and the speed of the rout is what makes this one stand out.
I'll be honest, my first instinct when I saw this ratio crash was that it was a screaming small-cap buy signal. I was wrong. The backtest data tells a very different story.
The broad signal
Drop the speed filter. Just the ratio rank going from above 95 to below 15, regardless of how long it takes, has happened 32 times. Across those, the