Small-caps poised for a mid-December surge

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Small-cap stocks tend to outperform big caps in January. This is frequently referred to as the “January Effect,” the tendency is clearly revealed by the graph above. Daily data since 1979 for the Russell 2000 index of smaller companies are divided by the Russell 1000 index of largest companies, and then compressed into a single year to show an idealized yearly pattern. When the graph is descending, large caps are outperforming smaller companies; when the graph is rising, smaller companies are moving up faster than their larger brethren.

In a typical year the smaller fry stay on the sidelines while the big boys are on the field. Then, around late November, small stocks begin to stir and in mid-December, they take off. Anticipated year-end dividends, payouts and bonuses could be a factor. Also, it is at this time of year that tax-loss selling abates and traders often pick up beaten-down, oversold small-cap shares.

Other major moves are quite evident just before Labor Day—possibly because individual investors are back from vacations. The move this year ahead of Labor Day (red line) began on cue, but quickly reversed before surging higher into mid-September. Small caps typically hold the lead through the beginning of June, though the bulk of the move is typically complete by early March.

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