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Joshua Brown

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J.C. Parets

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J.C. Parets is the Founder & President of Eagle Bay Capital, LLC. He earned the Chartered Market Technician designation (CMT) and is the Senior Editor for the Technical Analysis blog Allstarcharts.com

It's Game Time for Small Caps

Posted on 12/06/12 - 11:31 AM EST

This is their time to shine. From a seasonality perspective, small-cap stocks historically outperform their larger-cap counterparts over the next six months or so. This so called "January Effect" has become more popular over the years, so the outperformance typically begins in December.

My friend Jeff Hirsch, editor in chief of the Stock Trader's Almanac, has a great chart over at his blog showing the one year seasonal pattern for the Small-Cap Russell 2000 relative to the Larger-Cap Russell 1000. I think this tells the story nicely:

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"The one-year seasonal pattern of the Russell 2000/Russell 1000 has been plotted. Where the graph is falling large caps outperform small caps, when the graph is climbing small caps hold the advantage and outpace large caps. It's around mid-December, when small-cap stocks really begin to take off. This seasonal strength typically lasts until early June"

According to the Almanac, Small-Cap strength in the last half of December became even more magnified after the '87 market crash. The performance of the Russell 2000 has been almost twice as good as the Russell 1000 for the period between Dec 15th - Dec 31st since 1987, returning average of 3.5% and 1.8% respectively. From Dec 15th - Feb 15th, the Small-Caps averaged a 5.4% return since 1987, compared to just 2.9% for the Large-Caps. Those numbers are 5.9% compared to just 3.2% if you take it back to 1979.

To me, this data suggests that it generally pays to get a head start on the "January Effect" in mid-December. Interesting stuff...

Sources:

-- Small-Cap Strength Starts in Mid-December (StockTradersAlmanac)

-- Stock Trader's Almanac 2012

THE BLOG: http://allstarcharts.com/its-game-time-for-small-caps/

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