Don't Ignore This Chart!

The Bulls Want Small Cap Leadership To Resume


Advances in the stock market are much more bullish and likely more sustainable if small cap stocks are outperforming their large cap counterparts.  Over the past three years, we've seen very volatile relative action between the S&P 500 and Russell 2000.  During periods when the Russell 2000 has led, the stock market has performed much, much better.  To the contrary, when the large cap S&P 500 leads the way, gains seem to grind to a halt.  The following chart is a simple visual of how the S&P 500 performs (bottom half of the chart) based on the relative leadership of small caps (blue arrows rising on top half of chart) vs. the relative leadership of the S&P 500 (red arrow dropping):

If you're in the bullish camp, you want to see the relative ratio climb above relative resistance (red dotted line) while the bears want just the opposite - loss of relative support (green dotted line).

Happy trading!


Tom Bowley
About the author: co-founded Invested Central in 2004 and served as the site's Chief Market Strategist for more than 10 years. Invested Central provides stock market education and guidance for those interested in making their own financial decisions. During his tenure at Invested Central, Tom co-hosted Market Open LIVE, a national radio broadcast that covered many of the largest markets across the U.S. In addition, he has spoken at various conferences throughout the United States and Canada and has taught thousands of traders across the globe how to trade equities more wisely with an emphasis on managing risk and intermarket relationships. Learn More
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