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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 10^th 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.

From Close on	Trading Day of Month	To Close on	Trading Day of Month	Hold
Mar	10	May	12	Large-Cap
May	12	Jun	22	Small-Cap
Jun	22	Aug	6	Large-Cap
Aug	6	Sep	22	Small-Cap
Sep	22	Nov	15	Large-Cap
Nov	15	Mar	10	Small-Cap

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.

Measure	Switch	Split
Average 12-mos. %	+14.5%	+9.2%
Median 12-mos %	+14.8%	+10.9%
Std. Deviation%	18.1%	16.8%
Average/Standard Deviation	0.80	0.55
Worst 12.mos. %	(-45.8%)	(-49.0%)
% 12-mos. UP	82.1%	76.3%
% of 12-month periods outperforms	84.1%	15.9%

Figure 4 – Comparative Results: “Switching” versus “Splitting”; 1/4/1989-11/20/2017

Figure 5 displays the year-by-year results.

Year	Switch	Split	Diff	$1,000	$1,000
1989	22.9	19.4	3.5	1,229	1,194
1990	(9.5)	(14.1)	4.6	1,112	1,025
1991	40.7	35.3	5.4	1,565	1,387
1992	17.6	10.7	6.9	1,841	1,536
1993	13.1	12.0	1.0	2,082	1,721
1994	4.6	(2.8)	7.4	2,177	1,672
1995	31.0	30.3	0.7	2,852	2,179
1996	21.0	17.3	3.7	3,450	2,555
1997	32.6	25.7	6.9	4,577	3,213
1998	11.8	12.0	(0.2)	5,116	3,599
1999	14.8	18.5	(3.7)	5,873	4,266
2000	28.1	(6.2)	34.3	7,522	4,000
2001	3.8	(7.6)	11.4	7,807	3,695
2002	(17.0)	(22.3)	5.4	6,483	2,870
2003	35.2	35.6	(0.3)	8,768	3,890
2004	27.2	13.1	14.1	11,157	4,401
2005	6.6	3.8	2.8	11,898	4,570
2006	18.1	15.2	3.0	14,053	5,263
2007	5.4	0.5	4.8	14,807	5,290
2008	(30.8)	(37.0)	6.2	10,247	3,335
2009	24.6	25.3	(0.8)	12,765	4,180
2010	20.5	19.6	0.8	15,378	5,001
2011	(2.1)	(3.1)	1.0	15,058	4,845
2012	21.0	14.2	6.8	18,220	5,535
2013	40.7	33.9	6.8	25,642	7,411
2014	14.8	7.1	7.7	29,437	7,936
2015	1.5	(3.5)	4.9	29,875	7,661
2016	12.0	14.6	(2.5)	33,475	8,779
2017	14.3	13.0	1.4	38,273	9,917

Figure 5 – Year-by-Year Results; 1/4/1989-11/20/2017

The next switch occurs at the close on 11/21 (15^th 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.

Jay Kaeppel

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.