One of our favorite websites for years has been Sentimentrader.com and this morning they posted a brief review of what to expect when Small Caps start to lag Large Caps while the SP500 is hitting new highs as it is today.
To sum it up, the lag usually continues. Since 1978 there have been 18 similar circumstances but going forward the SP500 returned on average of +14% while the Russell 2000 returned +9.5%. Either way, its still pretty good but no sense in leaving money on the table.
In recent history, 1991 was the one year when Small Caps continued to excel, but in 1997 and 1998 the divergence between the SP500 and Russell 2000 was very pronounced with returns of +20.7% vs -8.4% and +16.1% vs. -1.8% respectively.
*Data from Sentimentrader.com