Dow 18,000 may be stealing headlines this week, but it will be smaller stocks' time to shine in January.
Small capitalization stocks — loosely defined has having a market value less than $1 billion — are primed to ride a January Effect seasonal tailwind, along with lower gas prices, to big gains versus their large-cap peers to start 2015, investors and analysts said.
It's been a big-cap world in 2014. The Dow Jones industrial average is up 9 percent and the S&P 500 is up 13 percent. Meanwhile, the Russell 2000 — the small-cap benchmark — is up just 3.5 percent. But that's starting to change.
The Russell is up more than 2 percent in the last month, greater than a one percent rise in the S&P 500.
Wall Street started trading the so-called January Effect sometime near the start of the 1980s. The effect refers to investors' selling smaller stocks out of their portfolios at the end of the year in order to take tax losses. They then buy back the shares in the new year.
As the trend became more popular, the phenomenon began happening earlier in December with the lift in small caps actually occurring before the start of the next year. So the group's recent outperformance should come as no surprise.
"After a year of consolidation, the setup on the RTY (Russell 2000) looks much more attractive to us than at any point in the last six-nine months," wrote Jonathan Krinsky, chief market technician for MKM Partners in New York. Based on historical patterns, he projects a rally of 12 to 13 percent for the small cap index.
A chart by Krinsky in his report shows the small-cap outperformance over the S&P 500 clearly occurring not only in January, but in the first three months of the calendar year.