It is common that in the early stage of economic or stock market recovery, small cap stocks outperform large cap stocks. We have seen that in the last 8 months until recently. In the most recent pullback, small caps were beaten so hard that many had stock prices go back to the pre-summer level. Small caps have not claimed the lost ground despite very strong rally of major indices since last Wednesday. Has risk aversion returned and we are in danger of a significant correction? Or small caps will catch up soon?
1-year and 3-month charts of Dow Jones Industrial Index (that represents large caps) and Russell 2000 (that represents small caps) show this divergence. [Click on diagrams to enlarge the view]