A lot has been written lately about the tendency for small-cap stocks to outperform large-cap stocks during the upcoming time of the year (for example). And rightly so. For whatever reason, the relationship between large-caps and small-caps has shown itself to be highly seasonal over the years. Let’s take a closer look.
Jay’s Large-Cap/Small-Cap Calendar
The table below displays my calendar for when to hold large-cap stocks versus when to hold small-cap stocks.
*Note that TDM stands for “Trading Day of the Month” and NOT date of the month – i.e., Mar 10 means at the close on the 10th trading day of March small-caps are sold and large-caps are bought.
*Also, for June and September if there are less than 22 trading days in the month then the trade is made at the close on the last trading day of the month.
Figure 1 – Jay’s Large-Cap/Small-Cap Calendar
The Test
*For testing purposes we will use ticker RUI (Russell 1000 Large-Cap Index) and ticker RUT (Russell 2000 Small-Cap Index).
*First we will look at a buy-and-hold approach using both indexes, then will compare it to our switching method.
The Results
Figure 2 shows the growth of $1,000 invested in each index separately as well as combined since January 4, 1989.
Figure 2 – Growth of $1,000 invested in RUT and RUI (separately and “Split” between the two); 1/4/1989-11/21/2017
Figure 3 applies the calendar displayed in Figure 1 – i.e., Ticker RUI is held from March TDM 10 through May TDM 12, the last trading day of June through August TDM 6 and the last trading day of September through November TDM 15 (with all switches being made at the close of the day). Ticker RUT is held during all other periods as indicated in Figure 1.
Note: The “red” line in Figure 3 is the “green” line from Figure 2 and represents splitting an initial $1,000 investment between RUI and RUT on a buy-and-hold basis.
Figure 3 then displays the “Switching” results versus the “Splitting” results (i.e., simply buying and hold both indexes).
Figure 3 – $1,000 invested using “Switching” strategy versus “Splitting” money evenly between two indexes; 1/4/1989-11/20/2017
For the record, the “Switching” strategy gained +3,727% since 1989 versus +892% for the “Splitting” strategy. While the Switching strategy return is 4.17 times greater than simply splitting money between both indexes, it does not come without risk and volatility. To wit:
*The average 12-month standard deviation of returns is actually higher (18.1%) using the Switching strategy versus splitting (16.8%)
*The Worst 12-month % decline for the Switching Strategy is still a whopping -45.8% – almost as much as the -49.0% for splitting.
Figure 4 – Comparative Results: “Switching” versus “Splitting”; 1/4/1989-11/20/2017
Figure 5 displays the year-by-year results.
Figure 5 – Year-by-Year Results; 1/4/1989-11/20/2017
The next switch occurs at the close on 11/21 (15th trading day of November 2017 out large-caps and into small-caps).
Summary
The “system” (such as it is) described herein is by no means of the “you can’t lose” variety (note the “Worst 12-month % loss” of -45.8%). Still, the fact that this entirely mechanical – and calendar-based – approach outgained a simple buy-and-hold approach by over 4-to-1 overall, and during 84% of all rolling 12-month periods – is nothing to sneeze at.
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.