Will small caps outperform through 2016?

The Russell 2000 has lagged the S&P 500 since early 2014 - approximately 2 years.  Similarly in 2011, small caps turned down first prior to the Euro Debt Crisis induced mini bear market.  The 5 year chart shows that small caps have lagged the S&P 500 significantly.  These trends don't last forever.  Small caps are usually the first out of the gate during a market uptrend and the first into the tank during a market downtrend.  If one were to assume that the bad news is now behind us and the market will begin to price in future growth, small caps should lead at least for short term and intermediate term.  Since the market bottomed in Feb, small caps have been leading the S&P 500 by a 2:1 ratio - significant early outperformance.

Small Cap Stocks To Lead Long Term

Everyone knows that small cap stocks are the canary-in-the-coal mine for the economy.  One can assess the strength of the overall global economy based on the performance of small cap stocks relative to large cap stocks.  They tend to outperform when business conditions are good (i.e. consumers are spending, fear is moderate, lenders are lending, interest rates are low, etc.)  During bear markets, small cap stocks underperform.  During bull markets, they outperform.  We are currently witnessing the beginning of long term small cap stock outperformance.

From a technical perspective, IWM which tracks the Russell 2000 small cap index, has broken out of a large ascending triangle pattern and is on its way to new highs.  We're just getting started...

Long Term NASDAQ Outperformance Began In The Late 1970s

There are many market similarities between present day and the late 1970s.  The late 70s early 80s saw the conclusion of a long secular bull market in commodities, similar to the late stage bull market in commodities we are currently experiencing.  One of the most overlooked comparisons between now and the 70s market is the relative outperformance of the NASDAQ.  Prior to the emergence of the broad secular bull market in the early 1980s, the NASDAQ was well on its way as early as 1978.  We are seeing a similar trend develop in the market today, however, the outperformance of the NASDAQ began immediately off of the market bottom in 2009.

I'm long the NASDAQ 100 Index through the QQQ.  It is my favourite "buy it and forget about it" holding.  I've been adding to it since 2006.

NASDAQ Outperforms The DJIA And S&P 500 2:1 Over The Long Term

Even after taking into account the dot-com bubble which reduced the NASDAQ by 78% from top to bottom, the NASDAQ still manages to outperform the DOW and S&P 500 by 2:1 over the long term. This chart says it all.