Small caps versus large caps at market lows

In the days before the mid October low for the S&P 500 Index, small caps strongly outperformed large caps. Here, I look at the track record of the small cap versus large cap ratio.

Russell 2000 Index versus S&P 500 Index   

• On October 10, the ratio forms a bullish divergence on its 14 day RSI and rallies strongly from there before the 15 October index low
• On July 25, there was a bullish divergence that led to a ratio rally but unlike other times, the market dropped
• On April 15 2013, there was a bullish divergence, leading to continuation of the long term ratio and index uptrend

Behaviour at earlier index lows

• October 2011: Ratio and SPX bottom simultaneously. Ratio has bullish RSI divergence
• August 2010: Ratio starts rallying on August 24, SPX rallies on September 01. Early warning, no ratio RSI divergence
• March 2009: Ratio and SPX bottom simultaneously. No ratio RSI divergence
  January 2008: Ratio bottoms  on January 11, SPX rallies on January 23. Early warning of brief rally
• June 2006: SPX low on June 13, falling again on June 20 but with ratio forming bullish divergence. Index low holds
• April 2005: SPX low on April 20, falling again on April 29 but with ratio forming bullish divergence. Index low holds

In summary

• October 2014 was the clearest case of the ratio leading the market, August 2010 was another example
• The October 2014 ratio rally was predicted by the divergence, as were others regardless of whether the index was at a low