Financial Perspectives

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Crossroad

When the stock market moves (up or down), the strength of that move is dependent upon how many stocks are participating in the direction of the move. For example, the more stocks that are going higher, the not only the higher the market goes but also the longer that move can last.  Logically, the inverse is true too.

There are many ways to slice up the US stock market but one of the simplest ways is to look at it by company market capitalization. Since the start of the year we can see in the chart below that performance has been directly proportional to market size. The largest companies (in red) have outperformed the mid-sized companies (in blue) which have, in turn, outperformed the smallest companies (in green).   As you can see, the smallest are actually negative for the year.  In a bullish environment we would expect to see all 3 segments moving up strongly together.

Looking at this same information for the current quarter shows not only the continuing performance to size relationship but a something a little disturbing.  Not only are the small caps (600 stocks) negative but the mid-caps (400 stocks) have turned down too.  This shows a deterioration in the underlying market structure.  Right now, the only thing holding the market up are the generals (the largest stocks).

The market is at a crossroad right here, right now and until it can get broader participation from the “soldiers” (small and mid-sized companies), further gains will be limited and an increasing chance that long overdue correction is at our doorstep.