In late-February small-cap stocks were left for dead. Try as I might to discover the culprit, I can’t quite put my finger on it. Nor have I heard a palatable explanation from the punditry class. I have my suspicions, of course.

Perhaps a powerful cabal of condor keepers conspired to create favorable market conditions finally. The loss-littered, six-month stretch preceding February certainly gave these cash flow seekers enough motivation to start manipulating. And as an employer of monthly condors, I certainly applaud their efforts. Keep it up, boys!

Before divulging my top theory on small-caps suckitude, let’s make sure we’re on the same page. When the cool kids say “small caps,” they’re referring to stocks with a market capitalization south of $2 billion. As the name suggests, these are the little guys on the playground. Some are newcomers to the public space with IPOs still fresh and egos bent on world domination. Because they’re earlier in the life cycle, they boast higher growth characteristics but also more risk.

Many lack a global footprint. After all, spanning the nation comes before entering foreign soil on the growth plan. This means small-caps don’t have the exposure to currency fluctuations so often mentioned as a cog in the profit machine of large caps. It also means their exposure lies in large part with the fate of the domestic economy. ‘Merica, in other words.

Da Charts

Tracking small-caps is as simple as looking at the Russell 2000 Index (RUT) or its accompanying ETF (IWM). Analyzing the chart in isolation means you’re focusing on its absolute performance. And, as I mentioned, it’s been laid low, dead. The grave is shallow, yes, but we haven’t seen so much as a finger twitch.

Until this week. I’ve been staring at the low-lying corpse for hours a day, and I coulda swore last week I saw some movement. The action since then has me rubbing my eyes and questioning my memory, however. More on that in a second.

The second way you can measure small-caps is using its relative performance. For this, you need another index to compare it against. Since we’re trying to ferret out the behavior of smaller companies, we can compare them to bigger ones (as in large-caps). For that, we’ll use the S&P 500 (SPX) or its accompanying ETF (SPY).

When overlaid with SPY, the sideways slithering of IWM looks even worse. It’s sleeping while large caps are flying. That’s what we call relative weakness.

Suspicions

So why do small-caps suck so? My best guess is our current location in the business cycle. Economies are weakening, earnings might be peaking, and the Fed is about to lower rates for the first time in a decade. All of these point toward late-cycle behavior.

Small-caps get hit harder during recessions. Perhaps traders are beginning to discount that. The silver lining is if the monetary magicians at the Fed save us with rate cuts and extend the expansion then perhaps small-caps play catch-up.

As for the movement I thought I saw last week – well, that was the strong accumulation day on the 24th. Unfortunately, the utter lack of follow-through has thoroughly dashed any bullish hopes. It will now take a move above $157.50 signal a resurrection is upon us.

When it finally happens, it should be BIG.

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