Oct

30

Now that the Red Sox are finished kicking the Rockies around we can go back to studying markets. There has been a fair amount of talk about how a few large cap stocks are carrying the market higher. The so called Hindenburg Omen is one such measure. The concern is that faltering breadth is a bad sign for the market.

To test this we can look at how the big cap weighted SPY ETF performs with respect to the equally weighted RSP ETF. Note that both funds are based on the same 500 stocks in the SnP average. So if the rally is broad based then the RSP should perform better. If it is concentrated in big caps then the SPY should be the better horse.

A simple ratio of SPY price divided by RSP price was the metric chosen. To establish what is a large variation in the ratio the min and max levels of the ratio for the last 20 days was chosen. Following are the returns for the subsequent 10 day period: 

.       After  After  After

.       Max     Min    All

Count    80     162    1087

Avg.   .26%    .31%    .44%

Std.  1.96%   1.90%   1.87%

Based on the results above we see that when the ratio was at one extreme or another the market actually slightly underperformed the average of all time periods.

Alston Mabry takes it one step further:

Inspired by Dr McDonnell's use of RSP and SPY to measure the small/large-cap relationship, I did a study using the Russell 1000 (RUI) [larger cap] and the Russell 2000 (RUT) [smaller cap].

Data: March '93 to present. For each day, calculated the previous 60-day % moves in both the RUI and RUT and the simply subtracted the RUT% from RUI% to get a net difference: positive means the large-cap RUI has been outperforming; negative, the small-cal RUT has been outperforming. Also calculated the forward 60-day % move in the S&P. Then pulled out each 60th day so as to have non-overlapping data points.

count: 60

mean RUI%-RUT%: -0.21%

sd: 6.70%

mean 60-day forward S&P: +2.16%

sd: 6.29%

And here are the means for the quintiles, with the data sorted by RUI%-RUT%, as well as the mean forward 60-day % change in the S&P, and the z of this S&P change:


RUI%-RUT% / S&P / z

+8.28% +6.34% +2.30

+2.45% +3.54% +0.76

+0.64% +3.33% +0.64

-2.90% -1.76% -2.16

-9.54% -0.64% -1.54

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