Quote Originally Posted by Billy View Post
Andrei,
It depends on the timeframe you are looking at, but in general, small caps are outperforming in uptrends and underperforming in downtrends. On timeframes lower than the 30-minute, I find the relative strength to be much erratic and without consistent predictive power.
The higher volatility is caused by the lower liquidity and limited hedging possibilities for individual stocks. Hence, sustained improving relative strength hints at growing risk-appetite by investors. Divergence or convergence of highs and lows between IWM and its RS line (vs. SPY) on the 60-minute or daily chart have often helped me well in my discretionary decisions.
I must insist that Pascal has backtested some of my ideas on IWM relative strength with the robot in mind and no reliable edges could be found.
Billy
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.