Small caps have improved notably off 2025 lows... but still struggle relatively to other areas of the market. What is in store?
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Small caps have struggled to put together any meaningful sustained rallies over the last few years, despite putting together numerous constructive technical pictures over the same timeframe. Recent action for the Russell 2000 has all of the markings of a similar kind of move to those seen throughout 2023 & 2024, where seemingly convincing price action ultimately saw further struggles and relative underperformance against large cap names.
We will start our diagnosis with a simple, top level look at the Russell 2000 (RUT). Sitting on a string of now seven consecutive buy signals, movement off of 2025 lows has certainly been constructive. The stair stepping pattern leaves plenty of support nearby as the index ultimately has gained nearly 2% this year. For some readers who may be just using the absolute picture in your analysis, this price action would signal it is time to go and pick up exposure to the group as we move into August.
For those of us willing to dig a bit deeper around the platform, however, the rally becomes somewhat less convincing. For starters, small caps remain relative laggards against other parts of the investable universe. Starting broadly by a simple 3.25% relative strength chart between RUT & SPX (below), one can see that relative price action favors the core of the market. In fact, small caps sit at multi-decade level relative lows at the time of this writing, speaking to the lack of upside participation seen from the group.
Speaking of participation, a relatively small number of small cap stocks exhibit favorable technical pictures evidenced by NDW’s technical indicator report. ^BPSCAP, which measures the percentage of small cap stocks trading on PnF buy signals sits at 37%. Take this value and compare it to ^BPLCAP, which suggests over 70% of large cap stocks trade on buy signals. Furthermore, broader asset allocation tools like DALI and the Asset Class Group Scores page continue to favor large cap options over the small cap counterparts.
All this to say, take the current small cap picture as a lesson that it is important to consider more than absolute price movement along in your analysis. While a productive small cap environment would almost undoubtedly be a tailwind for major markets, the current reality is that the group has been unable to sustain meaningful upside action over the last few years. For those with exposure, continue to tread lightly. For those without exposure, continue to hold off broadly speaking until more relative improvement is earned.
