While some of the luster may have worn off, small caps have ruled the last 12 months
While some of the luster may have worn off, small caps have ruled the last 12 months. The Russell 2000 Index (RUT) is up 9.3% in 2021 and 37.2% year-over-year. We discussed in this space last week how "meme mania" contributed to the breakout, especially since December 2020. Another chart has surfaced, once again from Schaeffer's Senior Market Strategist Chris Prybal, which underscores the stranglehold small caps have had on Wall Street. But is there a new heavyweight lurking?
The chart below sorts trailing 12-month returns by asset classification. As you can see, the RUT has been in the lead all year, since December 2020, when the meme stock craze first started gaining steam. However, you can also see the RUT's lead is dwindling, like a starting pitcher running out of gas. After all, the index has taken a 6.7% haircut this quarter.
Are options traders cognizant of this? Per the 10-day put/call volume ratio on the iShares Russell 2000 ETF below, it seems they have been. Back in July, the ratio raced up to its highest reading since Feb. 4, and quickly declined, an occurrence we explored in greater detail last week. Now, the ratio appears back on the upswing, meaning put traders are getting bolder.
When one entity starts to underperform, it usually means there is outperformance elsewhere. Per the first chart, the S&P 500 Index (SPX) and real estate have moved into the second and third-best returners, as of July. The SPX has always been a top of the table lingerer, having never fallen further than fourth in the past 12 months.
But real estate's asset class performance in 2021 is a true underdog story. After stumbling deep into negative territory to close out 2020, real estate returns finally broke through in February, and really took off in March. While there's been a stagnation around 30-35% this summer, it's an impressive rally nonetheless. Prybal noted that the last time real estate was the leading sector in terms of trailing 12-month performance was the pre-pandemic fall of October 2019.
If you've been following real estate, this isn't much of a surprise. Home prices nationwide grew by 17.2% in June 2021 compared with June 2020—a record high, according to the latest CoreLogic report. While it’s a trend years in the making, it was undoubtedly aided and abetted by the vaccine rollout in the spring and thus far undeterred by the delta variant of the summer. The resurgence has everyone wondering how long it will last. But more importantly, how can a savvy investor benefit?
The chart below plots the Real Estate Select Sector SPDR Fund ETF (XLRE) with the SPX. It illustrates XLRE's year-to-date lead, which could portend to real estate possibly getting out over its skis. If you're a savvy contrarian trader looking to dive into real estate, consider de-risking your portfolio by maintaining options exposure.
Subscribers to Schaeffer's Chart of the Week received this commentary on Sunday, August 22.