Will Mega-Caps Lead the Way?

Roger Nusbaum submits: Michael Kahn, in his regular Barron's column, talked about where the various major indices stand relative to their highs of the year along with his opinion, technically, on each of them.

He made an interesting point about a recent shift in leadership to larger companies, and drew what I thought was a good conclusion to pass along here.

He is focused on the S&P 100 ('OEX'), the biggest of the big, as the canary-in-the-coal-mine for the market. He says, "If the steadiest and strongest index runs into problems, then the rest better watch out."

There is an ETF that mimics the OEX, iShares S&P 100 Index ETF (OEF). I thought that to illustrate the point using the Rydex Russell Top 50 (XLG) might capture this point a little better.

This chart compares XLG to S&P 500 Index (SPY) for the last six months. A similar chart comparing OEF and SPY shows a flat line which is corroborated by a 0.982 correlation, per PortfolioScience. XLG has a slightly lower correlation to SPY than OEF at 0.935. As read I Michael's column, a rolling over of the biggest of the big would spell trouble; this chart just looks at it a little differently.

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