RT Journal Article
SR Electronic
T1 Size and the Domino Principle
JF Special Issues
FD Institutional Investor Journals
SP 51
OP 59
VO 2003
IS 1
A1 Satya Dev Pradhuman
A1 Mohamed Chbani
A1 William Kan
YR 2003
UL https://pm-research.com/content/2003/1/51.abstract
AB The rotation in size appears to swing like a pendulum through the entire equity market. A bull market for large cap stocks not only suggests that the largest companies within the large cap market dominate, but also the largest companies within the small cap market. As the market moves in a direction in favor of small or large, it appears that the rotation in size cascades across the market like a domino effect. The high correlation between the small cap cycle and an equal-weighted versus a market-weighted index supports the marginal effect—or domino principle—that operates across the equity market. This finding leads to several powerful investment implications: The domino principle suggests that size or market capitalization operates on the margin. As a result, active investors, both small cap and large cap, are forced to take a position on size. This effect also appears to exist across country markets. Active, not passive, strategies work better as lower capitalization stocks outperform. Conversely, passive strategies dominate in a large capitalization dominant market.