Current Market Leadership: Will it Shift? | ETF Trends

Let’s take a quick dive into the markets.  For the past 3+ months, the story has been “the larger the stock, the better it is performing.”  If we look at the strength of large cap stocks (bigger companies) versus mid cap and small cap stocks, the leadership lines up in sequential order: large caps lead mid-caps, and mid-caps lead small caps.  Larger companies have been outperforming the rest of market.  As large cap stocks rise, like the ones in the S&P 500, mid cap and small cap indexes have been in a sideways trading range for most of this year.

Current risk adjusted rankings for the US Style Indexes (based on Canterbury’s Volatility-Weighted-Relative-Strength):

Risk-Adjusted Rank US Style Index
1 Large Cap Growth
2 Large Cap Blend
3 Large Cap Value
4 Mid Cap Value
5 Mid Cap Blend
6 Mid Cap Growth
7 Small Cap Value
8 Small Cap Blend
9 Small Cap Growth

Source: Canterbury Investment Management, using State Street Style Index ETFs

If we examine just large caps, the same theme has applied.  Larger securities within the S&P 500 have dominated the markets over the last 3 months.  As a matter of fact, the S&P 500 is up 8% over the at time, while the technology sector is up 16.5% and Discretionary, Communications, and Healthcare are in the 8-10% range.  These sectors, shown in the chart below, have mostly growth-stocks carrying them.   Collectively, the sectors account for about two-thirds of the stock market’s overall movement.

Source: Canterbury Investment Management, using State Street Sector ETFs

Meanwhile, as for the other seven sectors, excluding Real Estate, none of them are up more than 5% in the last 3 months.  The point here is not to focus on the percentage returns, but to show just how much the market has been led by larger sectors and lagged by smaller ones.

Source: Canterbury Investment Management, using State Street Sector ETFs

Sector Rotation- Bottom Line

We just discussed how for the last 3 months the markets have been led by larger components.  Large cap stocks lead mid cap stocks, which lead small cap stocks.  The big question is, “where will the markets go from here?”  Will this trend continue?  Maybe, but we are seeing some smaller sectors start to take some leadership.  Look at the chart featuring the S&P 500 and the 6 sectors outside of the tech/health care stocks.  Notice that sectors such as Utilities, Consumer staples, and financials have started having a bit of relative outperformance over the last few weeks.

To begin the month of August, Utilities and Staples were ranked #10 and #6.  Today, Utilities has risen all the way to #4 and Staples is #3.  These are traditionally thought of as more “defensive” sectors, so it is interesting to see them rising in our risk-adjusted ranks.  On the other hand, technology and communications have slipped a few spots.  This is interesting for the markets, and it does improve the market’s breadth.  There is more participation amongst securities.