Provided by Dow Jones

Feb 11, 2021 10:24 AM PST

By Jack Denton

Critical information for the U.S. trading day

The Dow just scraped a record high on Wednesday while other indexes fell, led down by the Russell 2000 — the key index of stocks with a small market capitalization.

But don’t think the little guys are giving up just yet.

Our call of the day is from the financial research specialists at Leuthold Group, led by Doug Ramsey, James Paulsen, and Scott Opsal. They say that “a long-term leadership cycle” in small-cap stocks is under way — and it may be bad news for big indexes.

The Russell 2000 continues to register “ridiculously overbought” readings based on many technical factors, the researchers say, and that could be cause for market caution in the short-term. But the “extreme strength” of the index supports the Leuthold Group’s view that dominance in these stocks is here to stay.

Small-cap performance in January pushed the six-month total-return spread between the Russell 2000 and the S&P 500 above 25% for just the eighth time since 1960.

Now, here’s the kicker: In all of the seven past cases, it was only early or midway through a cycle where small-caps led stocks that the relative strength of the Russell 2000 breached the 25% mark.

That means more is likely to come, but it may not be a healthy sign for the stock market overall.

Since 1960, annualized returns for the S&P 500 were almost 6% lower when small-cap stocks have led. In fact, the researchers at Leuthold say that a portfolio of 50% cash and 50% small-caps could match the S&P 500’s volatility in the next few years while actually exceeding its return.

The backdrop of rising yields is also unlikely to derail this trajectory, the researchers say. Small-cap stocks have actually shown “a decisive performance edge” during recent periods when stock prices and bond yields moved in sync.