REFILE-LIVE MARKETS-Small caps have been looking pretty fair, especially in the magic mirror

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SMALL CAPS HAVE BEEN LOOKING PRETTY FAIR, ESPECIALLY IN THE MAGIC MIRROR

Since late summer, small caps have really been demanding attention. Indeed, the group has become a relative outperformer. With this, the theory of mirror image foldback forecasting offers the potential for a much more significant turn in favor of small caps over large caps.

Recent small-cap gains have dwarfed those of large caps. On a rolling six-month basis, the Russell 2000 .RUT has advanced nearly 20% vs. a 9% gain for the S&P 500 index .SPX.

So far in 2026, the RUT is posting a near-7% advance vs. an SPX rise of just over 1%. Additionally, although early in the year, the small-cap index has already scored four record closing highs (it scored nine for all of 2025).

Meanwhile, when looking at charts, traders can observe that time goes both backward and forward. Here is a monthly line chart of the RUT/SPX ratio.

After the ratio bottomed in 1999, small caps trended up relative to large caps for more than a decade. The ratio ultimately put in a double top with highs in 2011 and 2013. Small caps then trended down vs. large caps for more than a decade.

Of note, however, using July 2012 as the mirror image foldback pivot, we can see an inverse symmetry when comparing the pattern prior to this point and the pattern subsequent to this point.

The ratio's rise from its March 1999 low to its March 2011 high lasted 144 months. July 2012 essentially bisected the March 2011-September 2013 double top (-16 months and +14 months on either side). July 2012 was also 160 months after the March 1999 bottom.

Projecting forward 144 months from the September 2013 high and 160 months from the July 2012 pivot point brought us to September-November 2025. Looking over so many years, the recent July 2025 ratio low was pretty close to this zone in the scheme of things.

It now remains to be seen if this turn in favor of small caps, which occurred within the sphere of influence of the endpoints of the mirror image pattern, has further to run. If so, small caps may be poised to enjoy a multi-year period of outperformance, with the ratio's March 1994 close (0.5684) a reasonable target.

The ratio's July 2025 closing low is now seen as an important support level on a monthly closing basis.

(Terence Gabriel)

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