Rotation Underway: S&P100 from S&P600

Monday, August 14, 2006 | 01:14 PM

Technical Analysis gets a bad name, and for all the wrong reasons. People seem to be put off by some of the more esoteric pattern recognition issues, and that's a shame.

I prefer my technicals simple: A good chart is worth more than 1000 words, and can provide greater clarity and conviction than most fundamental stories.

For example, for the past 5 years, we have heard pundits wishfully say this was the year of the Big Cap stock.  12 months later:  they said, "No, I meant THIS year;" and after another year, we heard, "No THIS year!

Why bother guessing? If you track the ratio of Big Caps (S&P100) to Small Caps (S&P600) you can see a clear trend in their long-term relationship. When that ratio is trending lower, the small caps are outperforming the big caps. When its trending higher, the big caps are doing well.

The chart below is a perfect example:  Its apparent that, after 3 years, the downtrend ("Channel") of this relationship has been in has been broken, as has the 50 week moving average:

S&P100 ratio to S&P600


Source: Ritholtz Research & Analytics


Now, we can discuss all the fundamental reasons for this: We are late in the business cycle, small caps tend to get the extra mileage out of low cost borrowing, which is now much higher; I've seen arguments that claim the smalls are much more sensitive to rising commodity prices, where as big caps can extract volume discounts. Also, once the Fed stops, the dollar has historically tended to get weaker – that works to the benefit of bigger cap companies with more extensive overseas exposure.

All these stories may or may not be true -- but the bottom line is that if you own a lot of small caps and no big caps, the odds favor you underperforming over the near to intermediate term future.


UPDATE August 14, 2006 2:35pm

Rob Fraim sends along this chart via Art Huprich, Technical Analyst at Raymond James


The concept is quite similar . . .

Monday, August 14, 2006 | 01:14 PM | Permalink | Comments (14) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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» Big-Cap Time - Finally? from Bear Mountain Bull
Barrys right says over at The Big Picture, weve heard them tell us over and over, year after year, that THIS was going to the be year of the big cap stocks: For example, for the past 5 years, we have heard pundits wishfully say this was ... [Read More]

Tracked on Aug 14, 2006 2:27:41 PM


I pay attention to the relationship and the persistency of trends -- thats what interests me most --

As long as ratio was in the down channel, I was happy to avoid big caps and stick with smaller names. Now I am rotating away from small caps.

How is that hind site?

Posted by: Barry Ritholtz | Aug 14, 2006 2:06:02 PM

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