Recent Under-Performance in Small Caps Likely Portends an Inflection Point in Broader Risk Appetite

The 26 week RoC in the ratio of the R2K vs. SPX is -768 bps as of yesterday’s close.

In the top pane of the chart below we highlight where small caps have under-performed large caps to this degree of greater since the early 1990s.

As the red and green highlights suggest, this degree of small cap underperformance typically portends broader inflection points in overall risk appetite and future returns.

In fact, nearly all of the past two decade’s worth of memorably market rallies or sell-offs have begun following a period where small-caps initially under-perform large caps by the degree to which they recently have.

Again, per a lot of our posting recently, this too suggests a big move ahead.