Nifty Fifty Redux? Large Cap Strength, Small Cap Weakness

The S&P 500 Index (SPY; blue line above) hit fresh bull market highs this past week, but note that the number of stocks registering fresh 20-day highs barely exceeded the number making new lows during the week. Steadily fewer issues have participated in the rally since September, reflecting a narrowing of the bull market's base.

Much of this weakness reflects the relative strength of large cap stocks compared with smaller cap issues.

For example, I took a look at the excellent Decision Point site and noticed that fully 97% of Dow Industrial stocks are trading above their 20-day exponential moving averages (EMAs). For the S&P 500 large cap stocks, that percentage is 72%; for the NASDAQ 100 large caps, the proportion is 75%.

When we look at the broad NYSE Composite Index, however, the percentage of stocks trading above their 20-day EMAs is 59%. For the NASDAQ Composite, it is 41%.

Although 72% of S&P 500 large caps are trading above their 20-day EMAs, that percentage falls to 61% for S&P 400 midcaps and 45% for S&P 600 small caps.

One logical explanation is that U.S. dollar weakness is benefiting large cap companies (which often have international operations that benefit from a weak dollar) more than small cap companies. If that is the case and U.S. dollar weakness continues, we could see a repeat of "Nifty Fifty", in which market strength is largely driven by the largest cap stocks.

Comments

[bartpr:]

no one knows where the dollar will eventually go to. if this is the driver of large caps, when the dolar recovers, look out. it will not stay down forever, doolar demoninated us debt will ot stand for it. interest rate increases will be massive to save it. just like the depression years when rates had to go up to fend off gold withdraws. gold is not the standard now but foreign investors in us debt will nto stand for depreciation of the investments forever.

Nov 16 09:40 AM

[Northern Da...:]

Since Nov. of 2008, the Dow is up 21% and the dollar is down 15%. How can these values in the large caps be seen as any credible sort of "gain", never mind the small caps? This has been nothing more than a liquidity driven rally, not a rally based on any fantastic economic recovery. Quite the opposite, there's been very little true economic recovery, and there won't be until the central banks start lending all those reserves to businesses who need them, rather than to their dirty thieving buddies who use them in the dollar carry trade.

.

Nov 16 11:23 AM

[predictorma...:]

Not sure about this analysis. I have been making money on TZA of late. That would seem counter to this.

Nov 16 11:10 PM

[GotLife:]

Large caps offer several strengths over smaller firms in the current market.

1) Many have a substantial portion of their business in the international markets. This provides revenue in recovering economies in advance of the US market.

2) Along with more competitive pricing because of the dollar decline, the companies realize currency conversion benefits when they account for international sales.

3) Many pay significant dividends which help offset potential equity declines.

4) They offer heavily traded markets which facilitate option protection and executable stop loss orders.

5) They have negotiating power with suppliers and distributors in a bad economy.

6) In a future inflationary economy, they will have the ability to raise the top line through price increases. Although earnings may suffer short term, the firms should be able to price in the inflation, and unlike bonds, realize increased equity valuations, albeit in only nominal terms.

Nov 17 10:02 AM

[mbkelly75:]

Thanks for the link to DecisionPoint. I had not been out there before and it has a LOT of useful information on Technical Analysis. I use charting and information mainly from 2 sites: finviz.com and grahaminvestor.com. I use a program called "Market Browser to make my own custom charts right on my desktop also. I do not know if I agree with the analysis, but it is something to think about. I always appreciate articles that make me think. Thanks again for your work here.

Nov 17 10:04 AM

[mbkelly75:]

One more thing. DecisionPoint mentioned that it might be time to shift from RSP (S&P 500 but equal-weighted) back into SPY (S&P 500 but market cap weighted). That was a good idea and worth thinking about. RSPs 20 Day MA has trended down very near the 50 Day MA - it has not crossed it yet but might do it soon. The SPY is behaving much better at this time. This backs up DPs premise. Thanks again for the link.

Nov 17 10:29 AM