If anyone needs any convincing that small-cap stocks have recently been underperforming large-caps by a substantial margin, the charts tell the whole story. The primary benchmark index for small caps is the Russell 2000 index, which is represented by the RUT symbol (chart below), while the main large-cap benchmark has traditionally been the S&P 500, or SPX.

Small-Cap Underperformance

While both indexes have generally been falling in the past several trading days, the Russell 2000's current decline began significantly before that of the S&P 500 – in early September versus the large-cap benchmark's early October downturn. This helps to reinforce the traditional view that small-cap stocks can sometimes serve as a leading indicator for the overall markets, as the Russell 2000's earlier decline helped pave the way for a later drop in large caps.

Drop to Key Moving Average

Even further evidence of small-cap underperformance lies in the positioning of major moving averages – specifically, the widely watched 200-day and 50-day moving averages. In uptrends, these indicators help measure the magnitude of a pullback. While SPX has just made a shallow pullback to its 50-day moving average, the chart below shows RUT having made a much deeper pullback to its 200-day moving average, after having broken down below its 50-day in late September. While this does not, in itself, indicate doomsday for small caps, any strong decline below the 200-day would have many market-watchers proclaiming the beginnings of a new bear market.

Source: TradingView