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 usually overlooked. In the charts below, we highlight the relative strength of each S&P 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). For example, in the Consumer Discretionary sector we compare the performance of small cap Consumer Discretionary stocks to the S&P 600 Small Cap Index. 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, normally 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 have been leading the way by outperforming the S&P 500 by a wide margin. Mid caps and small caps on the other hand have barely been outperforming their respective indices. If you look closely at the charts, however, the sector has recently faltered, and that underperformance coincided with the start of the government shutdown.

In the Consumer Staples sector, mid caps had been the standout sector among the three over the last year. Since the middle of summer, however, mid cap consumer staples have begun to lag their S&P 400 mid cap index. Small cap Consumer Staples are just barely hanging on to positive territory over the last year, while large caps have been lagging by a pretty sizable margin.

As we have pointed out multiple times in the last several weeks, large cap Energy stocks led by Exxon (NYSE:XOM) and Chevron (NYSE:CVX) have been big laggards over the last year. As you slide down the market cap scale, however, relative strength has been improving. Small cap Energy sector stocks, for example, have been on a tear, and are outperforming the S&P 600 small cap index by the largest margin of the year.

The divergence between large cap Financial sector stocks and their mid and small cap peers has continued nearly unabated over the last year. In our view, the reason for this disparity stems from the regulatory environment, which favors larger firms over smaller ones. That being said, across all market caps, Financial sector stocks have been showing strength since the start of the month.

As we said in the first paragraph, normally you see similar sector performance across different market caps, and the Health Care sector is a perfect example. All three sectors (large, mid and small cap) are outperforming their respective indices by nearly identical margins.

Relative strength across the market cap spectrum is also similar in the Industrials sector. While the patterns are similar, mid caps are outperforming the S&P 400 by a wide margin, while large and small cap Industrials are outperforming their respective indices by a lesser, although comfortable, degree.

Back in the summer, the Materials sector was one of the weakest of the ten sectors. Since then, though, we have seen big rebounds in large cap Materials stocks relative to the S&P 500. One reason for this turnaround is the decline in the dollar. Large cap Materials sector stocks, have one of the highest exposure rates to international markets, so the weaker dollar has been a tailwind.

Large cap Technology stocks have been one of the more disappointing market sectors so far in 2013. Investors typically expect the sector to do well, when the overall market is doing well, but this year that has not been the case. Among the ten large cap sectors, the only two sectors doing worse are Telecom Services and Utilities. While large cap Technology has lagged, small cap Technology sector stocks have handily outperformed the S&P 600 small cap index.

Telecom Services and Utilities have been big laggards over the last year across all three market caps. Across the large, mid, and small cap space, the Telecom Services sector only has 15 stocks, so it probably shouldn't even be a sector. That being said, both sectors have been hit hard by the fact that the stocks have high dividend yields, and with interest rates rising this year, dividend payers have been adversely impact.