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Whenever you talk about what sectors of the market are working, market cap is one aspect that is often overlooked. How often have you heard someone say that Technology is leading large caps but lagging in small caps? Not often. With this in mind, we wanted to highlight the relative strength of all 10 sectors within both large and small cap indices.

In the charts below, we highlight the relative strength of each sector to its corresponding index across all three market cap levels (S&P 500 large cap, S&P 400 mid cap and S&P 600 small cap). Rising lines indicate that the sector is outperforming its index while a falling line indicates that the sector is underperforming. As you will see in the charts, most of the time the sector's relative strength moves in the same direction across all three market cap levels, but there are times when they diverge, and these divergences can be a sign of a turn.

In the Consumer Discretionary sector, large caps have been steadily outperforming the S&P 500 even as mid and small caps have started to falter. Over the last year, large cap Consumer Discretionary stocks have outperformed the S&P 500 by six percent, even as small caps have performed inline with the S&P 600 small cap index. One possible explanation for the divergence may be higher gas prices, which have already started to decline again. The key going forward will be whether small and mid cap Consumer Discretionary stocks can rebound. If not, expect the weakness to work its way up to the large cap sector as well.

Financial sector stocks have a similar set up to the Consumer Discretionary sector where large caps are outperforming while mid and small caps are lagging their respective indices. Here the divergence has been attributed to regulatory policies like Dodd-Frank, which favor the largest banks and financial institutions at the expense of their smaller and mid cap peers.

In the Healthcare sector, large and mid cap stocks have been steadily outperforming their respective indices while small caps have been lagging. Here again, the rationale for the divergence could be a ObamaCare, as whenever you have far reaching Federal legislation, it is often the largest companies that tend to benefit as they have more lobbying power and are better able to withstand the added costs of compliance.

Finally, while large cap stocks in the Consumer Discretionary, Financial, and Healthcare sectors have been leading their smaller cap peers, large cap stocks in the Industrial, Materials, and Technology sectors have been lagging the relative strength of their mid- and small-cap peers. The reason large caps are lagging in these sectors is due to the fact that in all three sectors, the large cap stocks generate a large proportion of their revenues outside of the United States, while the smaller cap companies have more of a domestic focus. Therefore, with the U.S. economy outperforming its global peers and the dollar showing strength, companies with higher international exposure are negatively impacted while companies with more domestic exposure see less of an impact.

Click to enlarge all images.

Source: Sector Relative Strength By Market Cap