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MIRROR, MIRROR ON THE WALL, WILL SMALL CAPS EVER BE THE FAIREST OF THEM ALL?

Small caps have been underachievers vs large caps for quite some time. That said, so far this quarter, the little guys have packed a punch.

However, the theory of mirror image foldback forecasting offers the potential for a much more significant turn in favor of small caps.

So far in 2025, the small-cap Russell 2000 .RUT is posting a 0.2% decline vs a 7.1% advance for the S&P 500 index .SPX. With this, the RUT is on pace to underperform the SPX for a fifth-straight year.

Quarter-to-date (QTD), however, the RUT is gaining 2.3% vs a 1.5% rise for the S&P 500.

In any event, time has always been a focus of study for both philosophers and scientists. However, for traders who look at cycles, time is also a critical factor.

Einstein believed that time is a relative concept distorted by an observer's frame of reference. In sleep, the passage of time is challenged or even suspended; however, in the market, when looking at charts, traders can observe that time goes both backward and forward.

Here is a monthly chart of the RUT/SPX ratio.

After the ratio bottomed in 1999, small caps trended up relative to large caps for more than a decade. The ratio ultimately put in a double top with highs in 2011 and 2013. Small caps have trended down vs large caps since.

Of note, however, using July 2012 as the mirror image foldback point, we can see an inverse symmetry when comparing the pattern prior to this pivot point and the pattern subsequent to this pivot point.

The ratio's rise from its March 1999 low to its March 2011 high lasted 144 months.

July 2012 essentially bisected the 2011-2013 double top (-16 months and +14 months on either side). July 2012 was also 160 months after the March 1999 bottom.

Projecting forward 160 months from the pivot point in time brings us to November 2025.

Thus, it now remains to be seen if the recent nascent turn in favor of small caps is within the sphere of influence of the end-point of the mirror image pattern.

If so, small caps may be poised to enjoy a multi-year period of outperformance, with the ratio's 1994 high a reasonable target.

Meanwhile, interest rate probabilities are calling for a total of around 131 basis points of Fed cuts through December 2026. It's not a slam-dunk, but lower interest rates can be a tailwind for smaller stocks.

(Terence Gabriel)

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EARLIER ON LIVE MARKETS:

THE GREAT DIVIDE AT THE BANK OF ENGLAND CLICK HERE

JAPANESE LAGGARDS TO PLAY CATCH UP, SAYS CITI CLICK HERE

MARKETS CALM, BUT YEN ROUT MEMORIES STIR HEDGING CLICK HERE

MORE GAINERS THAN FALLERS IN VOLATILE TRADE, PHARMA DOWN CLICK HERE

EUROPE BEFORE THE BELL: BOUNCE CONTINUES AS EARNINGS PLEASE CLICK HERE

TARIFF TOLL YET TO DETER STOCK BULLS CLICK HERE

(Terence Gabriel is a Reuters market analyst. The views expressed are his own)