Monday, February 13, 2006

Small and Midcap Stocks - Relative Performance

This is the first of my attempts to carefully separate out the small and mid cap universes by comparing the S&P 400 small caps ($SML) to the S&P 600 mid caps ($MID). I went back to March, 2004 (N = 482) and found 77 occasions in which SML was down by more than 1%--as was the case on Monday. I then investigated whether the relative performance of MID vs. SML had any impact on future short-term performance.

When SML has been down by 1% or more (N = 77), the next day in SML has averaged a gain of only .01% (41 up, 36 down). This offers no edge relative to the sample overall, which averages a gain of .06% (267 up, 215 down).

I then broke down the weak SML days in half based on MID performance. When SML was much weaker than MID (N = 38), the next day in SML averaged .20% (24 up, 14 down). When MID showed greater relative strength (N = 39), the next day in SML averaged a loss of -.18% (18 up, 21 down).

On Monday, SML was weak relative to MID, but not by a huge margin. Interestingly, it appears that, although SML and MID are highly correlated, relative weakness among the smallest stocks during a decline leads to a reversal, while relative strength leads to further weakness.

Because the Russell 2000 Index has components of both small and midcap issues, a differentiation of these might be helpful in predicting ER2 performance. That will be an upcoming project.


Paulo de León said...

It´s been a while since you mention the Nasdaq relative volatility to ES. That ratio register a bottom later last year and is improving. The NQ tape is better, that is less dull.

Brett Steenbarger, Ph.D. said...

Thanks for the observation. If relative volatility is the desire, IWM and MDY among the ETFs remain excellent vehicles, as well as SMH among NASDAQ-related sectors. There is a larger arb trade between ER2 and ES than ever before, tying the two closely in performance, but with higher volatility in the Russell.