November Is for the Little Guys

Steve Strazza
November 3, 2021

From the desk of Steve Strazza @Sstrazza 

The January Effect posits that financial markets experience a seasonal anomaly in the beginning of each year whereby stock prices tend to rise more than in any other month.

But this bullish period extends beyond a single month. In fact, our data show that buyers come out in full force starting in the late fall/early winter.

According to historic seasonal trends, the best time of the year for the stock market is from November to January. Smaller stocks are known to outperform during this period.

And if we’re focusing on small-caps, November is by far the single best month. So it should come as no surprise that the Russell 2000 and S&P Mid-Cap 400 are breaking out to fresh all-time highs this week. They did the same thing last November. In fact, November of 2020 was the best month ever for these small- and mid-cap indexes.

Let’s dive in and discuss some of the seasonal tailwinds supporting these new highs from SMIDs.

Here are some statistics for the Russell 2000 during November based on the last 20 years of return data:

The index has been higher 85% of the time for an average return of 3.50%. You can see this November strength in the chart image on the right. Notice how no other month's performance comes close to small-caps during November.

The chart on the left shows the monthly return for every November since 2000 and highlights last year's record-breaking rally, when the index gained more than 18%.

Mid-caps and large-caps also perform well in November. But the relative strength from small-caps is what really stands out when we crunch the numbers.

Here's a look at the same seasonal data but on a relative basis. This shows the average performance for the small-cap Russell 2000 relative to the large-cap Russell 1000.

The leadership from small-caps in November is best illustrated by the chart on the right-hand side, which measures the average monthly performance dating back to 2000.

In the middle chart, we can see the average monthly trend. Notice how the outperformance tends to ramp up toward the end of the month, similar to the absolute performance.

Some of the best information we can attain from seasonal trends comes when price does NOT do what it is supposed to do. For example, May through October are the worst six months based on history, so we would expect stocks to be under pressure during that time. We could make a sound argument that stocks went up during that period this year. But we can also make a sound argument that they did not. It really depends on what index we're talking about.

In our view, SMIDs more or less went sideways during the seasonally weak period this year. The fact that they did not go down -- but instead consolidated while large-caps rallied -- is bullish. It may have been messy, but they effectively bucked the seasonal trend and corrected through time rather than price.

Here’s a monthly price chart of IWM with the monthly rate of change in the bottom pane:

Price blasted to fresh highs in November of 2020 and enjoyed a strong upside leg before coiling in a continuation pattern starting back in March. When we look at risk assets around the world, we're seeing many formations similar to the one in small-caps right now. After impressive rallies off of last year’s lows, many charts are simply digesting gains and consolidating within the context of primary uptrends. And we continue to see more and more resolve higher.

With seasonality transitioning from a headwind to a tailwind, IWM is attempting to make an upside resolution from its year-to-date range. Here’s a closer look:

Wouldn’t it make sense for the index to break out during this strong period? We think so.

Wouldn’t it also make sense for SMIDs to finally catch higher, along with large-caps and other major indexes around the world? That's the bet we're making.

In fact, mid-caps are already registering a decisive breakout to new all-time highs this week. Here’s a look:

Notice how they're also carving out a bottom on a relative basis as the MDY/SPY ratio just made fresh four-month highs (bottom pane).

Let’s step back and weigh the evidence…

The large-cap averages are at highs. Transports are finally back to highs. Financials and energy are at highs. Tech is still at highs. Now, even mid-caps are at highs…

Not only do we think it is time for small-caps to join the party, but the data suggest there’s no better time for that to happen than now. Everything is falling into place for small-caps to have another memorable November.

After almost eight months of no progress, we think these new highs from the Russell 2000 are the real deal. We also think a relative trend reversal that favors outperformance from small- and mid-cap stocks could be underway. And considering these are risk-on developments, they're likely to occur in an environment where the broader market is trending higher too.

It looks like there are going to be some good parties this holiday season.

After all, it’s still a bull market.

Don't you agree? Let us know if you're buying these new highs with us or not.

Allstarcharts Team

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