Small Companies Start to Outperform
Igor Manukhov - Nov 07, 2022
Small companies start to outperform large ones. This is an encouraging sign for the overall market.
The markets have rallied off the lows from a few weeks ago and are trying to challenge their 50 day moving averages. The key question is whether the worst is now behind us or are we looking at yet another short-term bounce. One encouraging sign that things might be getting better from here is the relative outperformance from small companies (Russell 2000 index, black line on the bottom of the chart) relative to larger companies (S&P500, red line in the middle). The pink line on the top is a relative strength line that compares the performance of the Russell 2000 vs the S&P500. As you can see, it is starting to move up.
First of all, this is a signal that small companies might be worth a look now, since they are gaining relative strength against their more established counterparts.
In addition to that, it is also a bullish signal in itself. Note that this ratio has been improving after major bottoms formed since 2000 (marked with vertical blue lines and blue arrows). That would include the Tech Bubble bottom in 2003, the Financial Crisis bottom of 2009 and the recent Pandemic bottom in 2020. Time will tell whether this signal shall work again, but it is very encouraging to see.
