Sector Relative Strength By Market Cap

by: Bespoke Investment Group

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.

Consumer Discretionary stocks have been a pillar of strength throughout the entirety of the bull market. Recently, though, stocks in the sector across all three market cap ranges have shown some signs of underperformance. One primary factor behind that underperformance has no doubt been the rising price of oil and gas. When prices at the pump exceed $4 per gallon, consumers tend to rein in spending on other things.

Within the Consumer Staples sector, there has been a notable divergence between the performance of mid cap stocks versus large and small caps. As shown, while large and small cap stocks in the sector are both slightly underperforming their respective indices over the last year, the mid cap Consumer Staples sector has outperformed the overall mid cap index by more than 15%.

While rising oil prices may be starting to make their presence felt on the Consumer Discretionary sector, theEnergy sector has not seen any benefit. Over the last year, small cap Energy stocks have just slightly outperformed, while mid and small cap stocks in the sector have underperformed.

We have made several comments in the past regarding the advantage that legislation out of Washington like Dodd-Frank has given to large cap Financials. Judging by the divergence in performance between large cap Financials and their mid and small cap peers, the advantage is still alive and well.

Similar to the Financial sector, legislation like the Affordable Care Act has also given an advantage to larger cap Health Care stocks over similar stocks in the small cap sector. Given that larger firms typically have the scale and influence to win government business, investors have been more eager to stick with larger names in the sector over smaller companies with less scale and influence.

Regardless of market cap, Industrials sector stocks have been outperforming their respective indices. Over the last year, mid cap stocks in the sector are doing the best, while small and large cap Industrial stocks are both outperforming their respective indices by similar margins.

Materials stocks typically have a lot of exposure to commodities and international markets. Therefore the larger the stock, the more likely it is to have a large percentage of international exposure. Over the last year, that is exactly what we have seen in the sector. Large cap Materials sector stocks are underperforming by the largest degree, while small caps are actually slightly outperforming the overall S&P 600 small cap index.

Driven largely by Apple (NASDAQ:AAPL), and more recently Microsoft (NASDAQ:MSFT), large cap Technology stocks have been a drag over the last year, causing the large cap Technology sector to underperform by a wide margin. At the other end of the spectrum, however, small cap Technology stocks have actually outperformed the overall small cap index.

The Telecom Services and Utilities sectors have both underperformed over the last year regardless of market cap. One primary driver for the underperformance is the fact that these stocks typically have high dividend yields, and as interest rates have risen, stocks with high dividends have sold off.