One of the main themes we’ve been hitting on in the past few months/quarters is the aggressive shift in leadership down the market cap scale.
When we take a step back, this all jives with what we’re seeing in other asset classes as investors are rushing into risk assets as they position themselves more offensively.
This development really began last March as the market was bottoming from its swift Q1 selloff. Although the relative trend really accelerated in early September as Mid, Small, and Micro-Caps began to drastically outperform their Large-Cap peers.
Let’s take a look at how this cap-rotation has impacted some of the secular leaders at a sector and industry level.
This chart does a great job of illustrating how sector and industry groups’ performance of late has everything to do with their size.
On the y-axis (on the left), we’re looking at percent change relative to the S&P 500 since September 2nd, and for the x-axis (at the bottom), we’re looking at the percent change relative to the S&P 500 since November 9th.
*September 2nd is when Mega-caps peaked and November 9th is when the outperformance in SMIDs really started to accelerate (Small vs Large-Cap ratio broke out above its key June highs).
Just look at the relative weakness from secular leaders such as the Large-Cap Tech and Discretionary Sector SPDRs as well as some of the strongest industry groups like Software and Internet.
Meanwhile, Technology and Consumer Discretionary stocks at the Small-Cap level have been cruising higher.
It is a strange development to see stocks of the same sector diverge so much in performance based merely on size. It almost seems as though investors are buying smaller stocks indiscriminately, with little regard for what sector or industry they belong to.
We think this recent gap in performance between small and large stocks is going to narrow in the coming weeks/months. The more important question is whether Large-Caps rally and catch up, Small-Caps correct and catch lower, or a little bit of both…
As we remain firmly in the bull camp and want to remain buyers of stocks, we think it is most likely to be the former scenario whereas these large-cap areas reassert their former leadership roles at least over the short to intermediate-term.
In fact, it may have already started as SMIDs are extended and due to cool down while many Mega-Cap growth stocks appear to be resolving higher from continuation pattern.
This kind of rotation back into the big guys and former leaders would make perfect sense within the context of a healthy bull market.
As you know, we’re always looking for leadership and opportunities to invest in the strongest names from the strongest areas of the market.
As such, we’ll continue to watch this development to make sure we’re positioned appropriately and betting on the winning areas in the months ahead.
Let us know what you think.