Small caps have been on fire, as the Russell 2000 has been up 10 consecutive days for the first time since March 2013. As we noted in our Weekly Market Commentary: “What A Week,” small caps could be one of the groups to benefit from a Trump presidency, due to easier credit standards and their greater domestic focus. This huge run brings with it many questions—most specifically, can this rally continue?
Going back in history, the Russell 2000 has been higher 10 consecutive days 19 other times and the median return a month later has been 2.8%, twice the average median monthly return of 1.4%. Then going out three months, again the returns were stronger than usual. Once you get out to six months, returns normalize. In other words, the near-term returns after long win streaks on small caps tend to see an extension of the near-term strength. According to Ryan Detrick, Senior Market Strategist, “The recent strength in small caps is a nice sign for the overall market, as small cap strength tends to reflect more of an appetite for risk. Not to mention, when the Russell 2000 is up 10 days in a row, this actually leads to stronger returns going out.”
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Long/short equity fund Southpoint Capital returned 14.7% in the fourth quarter of 2020, and 28.6% for 2020 as a whole, that's according to a copy of the firm's annual letter to investors, which ValueWalk has been able to review. Q4 2020 hedge fund letters, conferences and more This return compared to a 12.1% gain in Read More
Another way to look at this is the Russell 2000 is up more than 13% the past 10 days, the best 10-day rally since July 2009. You’d think big moves like this could suggest a near-term pullback, but surprisingly that may not be the case, as the Russell 2000 has been up another 6.0% on average a month later after big 10-day surges. Below we looked at the largest 10-day rallies, looking at only the initial rally when several 10-day rallies were clustered together, as often happens.
Last, if you simply looked at the Russell 2000 relative to the S&P 500, small caps have delivered above-average returns going back nearly three years. This could be another clue that small caps are finally improving after lagging their large cap peers for years.