Handicapping small caps vs. large caps

We got a question from Charlie about yesterday’s blog post on small caps: Can you handicap the percentage of outperformance IWM needs versus SPY to stay above its 200-day moving average (DMA)?

While it’s tough to assign a precise number, IWM did close above its 200-DMA vs. SPY yesterday. One day doesn’t make a trend, but even modest relative strength should keep IWM above that level. Plus, the double bottom pattern in IWM vs. SPY highlighted in yesterday's post projects relative strength beyond the 200-DMA.

The chart below highlights IWM’s trend relative to SPY — green means IWM is above its 200-DMA. White means that IWM is below its 200-DMA vs. SPY. As of now, we’ve only seen one green day (August 27). Given the long-term downtrend for small caps vs. large caps, a breakout above a 5-year downtrend line may be needed for a more sustained shift to leadership from IWM in addition to a move above the 200-DMA.

The next chart shows IWM and SPY from their April 8, 2025, lows. IWM is up 35.1% vs. SPY's 30.5% since the April lows. IWM has shown significant strength vs. SPX in late August. Holding onto this strength is key for staying above the 200-DMA relative to SPY, but it could take a few tries for IWM to sustain a rally this technical milestone.