Sector Relative Strength By Market Cap

by: Bespoke Investment Group

With the S&P 500 hitting an all-time high today, we wanted to look at the relative strength of sectors based on market cap to see which sectors have led the market into literally uncharted territory. 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.

For much of 2013, consumer discretionary has been a tale of different market caps. While large-cap discretionary sector stocks have been steadily outperforming, their small-cap and mid-cap peers have been performing merely in line with their respective indices so far this year. In the consumer staples sector, it is mid-caps that have led the way, although large-cap and small-cap Consumer Staples stocks have also been outperforming.

Energy, materials, and technology are three sectors that generate the highest percentage of their revenues outside of the United States. For all three sectors, the last year has been largely a period of underperformance. One exception in these three sectors has been the small-cap materials sector, which has benefited from a more U.S.-centric focus.

The three financial sectors have all outperformed their respective indices over the last 12 months, but they have been following very different paths. While the large caps have been seeing improved relative strength since last summer, their small-cap and mid-cap peers saw their relative strength peak right about the same time.

In the healthcare sector, there has been a wide divergence between relative strength based on market cap. As shown, large and mid-caps have seen strong performance on a relative basis, while small caps have lagged. One possible explanation for the divergence may be due to the Affordable Care Act. By nature, increased regulation and compliance puts smaller companies at a disadvantage.

The large-cap industrials sector has performed in line with the S&P 500 over the last year, while small and mid-caps have outperformed. This divergence is most likely due to decreased international exposure in the small-cap and mid-cap sectors relative to large caps.

Finally, when you see the S&P 500 hitting all-time highs, the last sector you would expect to see showing increased momentum is utilities, but that is exactly what we have seen in the last several trading days as the relative strength across all three market caps has spiked.