Over the last four and a half years, we have observed a consistent pattern: large caps have massively outperformed small caps. This is quite unusual, considering that stocks have primarily been in a bull market. There is significant value in the small-cap space, but it continues to be overlooked by investors in favor of larger companies.
Here is the chart of the ratio between IWM (small-cap ETF) and SPY (S&P 500 ETF). It has been in a steady decline.
We think it is getting overdone. Eventually (shortly), investors will notice the enormous value that small-cap stocks offer as compared to the historically overpriced large-cap equities. The long IWM/short SPY trade is starting to look like an interesting market-neutral strategy.
Dennis
