Don't Ignore This Chart!

Equal-weight S&P 500 Continues to Reflect Risk Aversion


Among other ways, chartists can measure the risk appetite in the stock market by comparing the performance of the Equal-weight S&P 500 ETF (RSP) with the S&P 500 SPDR (SPY). RSP represents the average stock in the S&P 500 and the performance of small and mid caps. SPY represents large-caps in the S&P 500 and the performance for the largest stocks. Note that the top fifty stocks in SPY account for 48.77% of the ETF.  

Chartists can compare performance by using a ratio chart (RSP:SPY) and adding indicators to define the trend. The main chart window shows the RSP:SPY ratio with the 5-week EMA (pink) and the 52-week EMA (blue). The trend is up when the 5-week EMA is above the 52-week EMA and down when the 5-week EMA is below the 52-week EMA. An uptrend in this ratio means the small and mid caps are outperforming the large caps in the index and this shows a strong appetite for risk in the stock market. A downtrend means small and mid caps are underperforming and this reflects a weak appetite for risk. Notice that this ratio has been falling since May 2015. 

The middle window shows the PPO(5,52,1) applied to the RSP:SPY ratio. This makes it easier to quantify the trend and identify moving average crossovers. The PPO is positive when the 5-week EMA is above the 52-week EMA and negative otherwise. Notice that the PPO has been negative since May 2015. Also notice that the PPO is at its lowest level in over 3 years, as is the RSP:SPY ratio. Even though this downtrend in relative weakness appears extended, it is a strong downtrend and it reflects risk aversion in the stock market. 

Thanks for tuning in and have a good day!
--Arthur Hill CMT

Plan your Trade and Trade your Plan


Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More
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