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Whenever you talk about which sectors of the market are working, market cap is one aspect that is often overlooked. In the charts below, we highlight the relative strength of each sector compared 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 that a turn is coming.

  • In the Consumer Discretionary sector, large caps and small caps are both at their highest levels of outperformance in a year. Mid-caps have also outperformed over the last year, but have not been as strong relative to their index as their large- and small-cap peers. With the U.S. economy outperforming the rest of the world, stocks in the Consumer Discretionary sector continue to benefit from their exposure to the U.S. consumer.
  • Up until recently, Consumer Staples have been an area of strength in the market, but in the last two weeks we have seen a rotation out of defensive sectors and into more cyclical ones. As a result, the sector has seen a major dent in its margin of outperformance across all market caps.
  • With commodities in general under pressure, the Energy sector has been an area of weakness. While the sector has seen some improvement in the last several days, it will be some time before this sector becomes a leader.
  • Within the Financials sector, large caps continue to benefit from Federal regulations that put them at a distinct advantage over their smaller peers.
  • Healthcare is another sector that was benefitting from its defensive characteristics, but as investors rotate into more economically sensitive sectors, it has seen outflows. Small-cap healthcare stocks have lagged recently and are now actually underperforming their peer index over the last year.
  • The Industrials sector has been a real laggard over the last two months. Although the declines in relative strength have stopped, the sector has not seen much of a benefit from the rotation out of defensives.
  • Like Industrials, the Materials sector has been an underperformer for much of 2013. In the last couple of weeks, however, the sector has caught a bid relative to the rest of the market.
  • Technology has been the biggest laggard in the market for the last year, and that underperformance has been the most evident in the large-cap Technology sector as Apple (AAPL) has acted as an anchor. In recent weeks, though, shares of AAPL have seen a reprieve from the selling and that has helped to fuel a turnaround in Tech.
  • The Telecom Services sector has seen mixed results across varying market caps in the last year, and this is primarily due to the fact that there are so few stocks in the sector. Within the entire S&P 1500, there are only 16 Telecom stocks.
  • Finally, Utilities had been a leader for much of 2013 as investors were attracted to the sector's high dividend yield. But, like other defensives, Utilities stocks have really underperformed lately.

Click to enlarge images.

Source: Sector Relative Strength By Market Cap