There are a number of signs, however, that valuation concerns are taking their toll on areas of the U.S. stock market. Extremely overpriced small-caps via iShares Russell 2000 (IWM) and micro-caps via (IWC) are dramatically underperforming larger company benchmarks. First Trust Technology Dividend (TDIV) with more attractive fundamentals (e.g., P/E, P/B, etc.) is outpacing the broader technology barometer, SPDR Select Sector Technology (XLK). Meanwhile, geopolitical strife in Ukraine as well as the Middle East has done little to dissuade demand for cheaper emerging markets. The Vanguard Emerging Markets (VWO):SPDR S&P 500 Trust (SPY) price ratio is bumping up against its highest relative strength positioning here in 2014.
The folks at ETF Screen have another method for checking changes in momentum. In particular, Relative Strength Factor (RSf) incorporates the entire universe of exchange-traded funds, assigning a percentile ranking (0-99.9) that rates a given fund’s performance relative to all others. One can then use the RSf tables to visualize improvement or enhancement over desired time periods.
Here are some changes to relative strength factor scores over the last three months:
| Wither Small Caps, Flourish Emergers? | |||||||
| RSf 4/28/14 | RSf 7/23/14 | ||||||
| iShares China Large Cap (FXI) | 16.9 | 86.3 | |||||
| iShares MSCI BRIC ETF (BKF) | 22.6 | 81.5 | |||||
| SPDR S&P Emerging Asia Pacific (GMF) | 38.6 | 89.3 | |||||
| Market Vectors Indonesia (IDX) | 42.6 | 82.6 | |||||
| iShares MSCI Brazil (EWZ) | 51.0 | 87.6 | |||||
| RevenueShares Small Cap (RWJ) | 83.9 | 46.4 | |||||
| Guggenheim S&P Small Cap Pure Value (RZV) | 80.9 | 37.9 | |||||
| Schwab International Small Cap (SCHC) | 78.9 | 54.0 | |||||
| WisdomTree International Small Cap (DLS) | 75.8 | 44.9 | |||||
| First Trust Small Cap Value Alphadex (FYT) | 75.5 | 32.5 | |||||
There is ample evidence to suggest that small company overvaluation as well as emerging market undervaluation is beginning to play a part in current market dynamics. Moreover, with the U.S. economy as well as the consumer showing signs of deceleration, large-caps as well as undervalued assets may provide more reasonable reward for the risk.