Small-caps Underperform Despite December Seasonal Pattern


There are two bullish seasonal patterns at work right now. First, stocks have shown a strong tendency to advance in December. Second, small-caps have shown a strong tendency to outperform large-caps in December. Over the last twenty years, the S&P 500 has risen 75% of the time and the average gain was 1.60%. The Russell 2000 has risen 90% of the time and the average gain was 3.5%. Yes, you read right. Don't take my word for it, check out our seasonality charts below. This is a pretty staggering statistic that gives the Russell 2000 a bullish bias heading into yearend. Furthermore, Charlie Bilello of Pension Partners took December seasonality one step further and found that most of the strength comes in the second half of the month. And finally, it is also worth mentioning that the Russell 2000 outperformed the S&P 500 75% of the time over the last twenty years. Seasonal tendencies are one thing, and trend is another so I will focus on the IWM chart after the jump. 

The Russell 2000 iShares (IWM) has yet to start out performing and is up less than 1% so far this month. The second chart shows IWM surging in October and then consolidating the last five weeks. Even though it is not picture perfect, the pattern resembles a flat flag, which is a bullish continuation pattern. IWM bounced off support in the 114-115 area twice, but remains shy of a breakout that would signal a continuation of the October surge. A break above the November highs would confirm the bull flag and target a move to new highs. The indicator window shows the IWM:SPY ratio working its way lower the last few weeks. The ratio has yet to break the mid October low, but IWM shows relative weakness and a break above the October-November highs is needed for IWM to start showing relative strength again. 

Thanks for tuning in and have a great weekend!
Arthur Hill CMT

Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More
Subscribe to ChartWatchers to be notified whenever a new post is added to this blog!
comments powered by Disqus