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Several multicap managers have been rotating out of small cap stocks lately thinking the run is over, writes Roger Nusbaum. Are they right?

I have touched on this before in a couple of different ways. The first thing here is the market history on this. Small cap typically leads at the start of a bull market cycle. The average period of time that small cap leads is about 3 years. There have been times where small cap has lead for as long as 5 years.

So far this year small cap has out performed by a matter of basis points. If small cap outperforms large cap this year, that would be six years in a row. I believe that would be a record. So it makes sense to at least question whether small cap will soon lag large cap. In some of the six years the lead of small cap has been very narrow, perhaps that invalidates the six year issue, I'm not sure.

With the history lesson out of the way, the reader wants to know what I think. I doubt he will like my answer. I don't think in terms of how much small cap or large cap I have. The way I look at it is by average cap size of the portfolio. The average cap size of the S+P 500 is about $90 billion. These days the average cap size of client portfolios is around $40 billion up from $35 billion a few months ago.

Depending on what is going on at the time, increasing cap size might mean selling a smaller name or it might mean adding a a larger name with out selling anything. Hence the logic behind thinking of cap size in this way.

While I don't know exactly when, I imagine my next move will be to make the average cap size a little bigger than it is now. The visibility to this is that if things go I think they might next year I would add a little more foreign to the mix, some of which will increase the average cap size of the portfolio.

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Source: Is the Small Cap Stocks and ETFs Run Over (IJR, IWM)?