Quote Originally Posted by EB View Post
Also, as Billy has noted before, the number of small caps has shrunk dramatically over the past five years, so there are few components from which the small cap indexes can choose. A long term backtest of relative strength would need to consider this likely source of non-stationarity.
Excellent reminder, Bob.
Let me also recall that the IWM robot was chosen instead of a SPY or QQQ robot because the small caps’s higher beta led to a long term risk-adjusted return more than twice superior with a correlation close to 100% with SPY and QQQ. The RS advantages of small caps are therefore actually integrated in the IWM robot itself. It works so well only because of Pascal’s advanced and sophisticate market direction components of the robot design. If it was not the case, the robot could only underperform.
Billy