When small-cap stocks suddenly outperform large-cap peers, does it really signal a market shift worth betting on?

The numbers tell an interesting story. Over a 4-month window, the small-cap to large-cap ratio swung dramatically—jumping from below 15th percentile all the way to 100th. That's the kind of reversal that gets traders' attention.

Here's what happened after: The S&P 500 climbed 81% over the following 12 months, while the Russell 2000 posted 75% gains within just 3 months after the trigger event. Pretty solid moves across the board.

But here's the catch—this signal doesn't work everywhere. It performs best when the overall market is already bullish. During sideways or bearish periods, small-cap strength becomes a much less reliable predictor. Context matters as much as the data itself.

So while the ratio reversal can be a useful tool in your analysis kit, treating it as a standalone buy signal is risky. Pair it with broader market conditions, and you've got something worth watching.