While the S&P 500 index and the Dow Industrials are poised to set new all-time highs, small cap stocks have lagged the major indexes, which has somewhat gone unnoticed. Sure the momentum stocks have received headlines as stocks like Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB) have tumbled since the end of February, but the leaders have been across the small cap spectrum and they are now under pressure.
To analyze whether the broader markets can rally over while the small caps lag, a graph was create that shows the Dow Industrial relative to the Russell 2000 index. The chart below shows the ration of the two indices, that is weekly over the past 5-years. What can be seen from this chart is rather interesting and can assist in the process of determining where we currently stand in the stock cycle.
The red line is the Dow Industrials divided by the Russell 200, and it shows that during the 2013 rally the Russell outperformed the Dow and declined to the lowest levels seen over the past 5-year period. What can also be observed is that when the spread retraces as it did in the summer of 2010, 2011 and 2012, the broader S&P 500 index declined.
Recently the spread has increased sharply, increasing more than 7% since March of 2013. Interestingly enough the S&P 500 has remained robust and has not declined along with increasing values in the spread. The question for investors is whether the large cap stocks cap continue to test new highs while the Russell is underperforming the large cap indices.