US Stocks: Some Perspective On Current Market Leadership

Mark Arbeter

In the past couple of months, larger capitalization stocks (large-caps) have taken the major blue chip indices higher, shouldering a lot of the load.

I have talked about this being a negative in the past as it’s much more preferable to see the troops (smaller stocks) lead the generals (very large stocks) on the upside.

Stock Market: A Little Perspective is a Good Thing

There are a couple of ways to examine how big and small stocks are acting. A simple ratio of the S&P 500 equal-weighted index (SPXEW) vs. the S&P 500 (INDEXSP:.INX) is one of our favorites. Generally, healthier stock markets occur and have more staying power when the equal-weighted index (little guys) are outperforming the basic weighted S&P 500 (large guys). Interestingly, since December 8, the larger stocks have been outperforming the smaller stocks. So despite all the talk of “animal spirits,” a.k.a. risk taking, investors are pushing the larger less risky stocks more than the smaller more risky stocks.

S&P 500 Equal Weighted Index / S&P 500 Index Ratio Chart

Another way to analyze how the small stocks are doing vs. mega caps is to simply compare the return of one index such as the Russell 2000 small cap (INDEXRUSSELL:RUT) with the S&P 500 or the Dow Jones Industrials over a specific time period. On a relative basis, the “2000” has been underperforming the “500” since (yea you guessed it) December 8. Since that time, the S&P 500 has risen 6.3% while the Russell 2000 is only up 1.2%. To stop the analysis here is very foolish, but I’ve seen it done plenty of times. Why?

Well, one must always take into consideration what happened leading up to December 8 to potentially see why the “2000” is severely underperforming the “500” over the past couple of months. From November 3 to December 8, the Russell 2000 skyrocketed 19.8% while the “500” rallied 7.5%. So in recent months, the “500’s” outperformance is just a reflection of the small caps taking a much-deserved breather after a one-month bull market, and not a reflection of weakness in the small stocks relative to the large caps. Therefore, this is not something to worry about for now.

Thanks for reading.

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Twitter:  @MarkArbeter

The author is short crude oil via SCO at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.