Will small cap equities react more positively to the latest central bank move as the markets continue to digest the news of rates remaining static? The lack of a rate cut has brought volatility back to the markets, which could possibly see gains in large caps falter and investors downsizing to small cap opportunities.
While the central bank elected to keep interest rates static this week, the markets dipped into the red with the Dow Jones Industrial Average falling close to 300 points combined in two straight sessions. With a U.S.-China trade deal already priced into the markets, investors were looking for another trigger event–a rate cut–except the Federal Reserve passed on that notion and stayed put.
“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,” the Federal Open Market Committee’s policy statement read.
Fed Chairman Jerome Powell reiterated his ongoing message of patience as the wait-and-see approach by the central bank continues to persist.
“The market was pricing in nothing but rate cuts,” said Gennadiy Goldberg, United States rates strategist at TD Securities. “I think he was trying to push back against the idea that the economy is turning lower and the Fed can never generate inflation.”
For investors looking for continued upside in large cap equities over small caps, the Direxion Russell Large Over Small Cap ETF (NYSEArca: RWLS) offers them the ability to benefit not only from large cap equities potentially performing well, but from their outperformance compared to their small cap brethren.
RWSL features:
- The Index measures the performance of a portfolio that has 150% long exposure to the Russell 2000® Index (the “Long Component”) and 50% short exposure to the Russell 1000® Index (the “Short Component”).
- On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150% and the weight of the Short Component is equal to 50% of the Index value.
- In tracking the Index, the Fund seeks to provide a vehicle for investors looking to efficiently express a small-capitalization over large-capitalization investment view by overweighting exposure to the Long Component and shorting exposure to the Short Component. One cannot directly invest in an index.
The strength in large caps is certainly something to take note off, particularly when it comes to the Relative Strength Index (RSI) technical indicator–a common tool for traders when assessing whether an ETF is overbought (the index above 70) or oversold (the index below 30). The RSI indicator could be signaling a potential sell-off for large cap equities, which could in turn, shift the tide for small cap equities.
With large caps currently at 70 and their small cap brethren at 60, does it mean the air is ready to come out of the large cap run? It’s not quite clear just yet.
“First, investors moved sharply in favor of large caps and then away from them following the volatility event in early February of that year,” David Mazza, Managing Director, Head of Product at Direxion Investments, wrote in Direxion’s latest Relative Weight Spotlight. “Unless we see flows continue to trend toward large caps, positioning is not offering much insight as of today.”
For more relative market trends, visit our Relative Value Channel.