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Big Caps to Finally Outperform Small?


Big Caps to Finally Outperform Small?
By Mike Paulenoff, MPTrader.com (www.mptrader.com)

Below is a picture of the relationship between the cash S&P 500 (SPX) big-cap index and the Russell 2000 index of small caps. What we see is that for the past year, the value of the SPX has deteriorated in relation to the value of the Russ ... at least until recently. My pattern work coupled with my momentum oscillators suggest very strongly that the SPX is on the verge of outperforming the Russell.

As of the April 24 close, the Russell was up 34% for the past 12 months, whereas the SPX was up "only" 15%. If this chart and my work prove accurate, then during the upcoming weeks and months the leadership will flip-flop. More than a month ago we called for a spread trade in our subscription service -- short the Russ (using the IWM exchange traded fund) versus long the SPX (SPY) in an equal dollar amount. For example, $25,000 of each would amount to buying roughly 200 shares of the SPYs while shorting roughly 330 shares of the IWM.

In the coming months, if the SPY/IWM ratio climbs to 1.85, from where we suggested the trade at 1.71 (it's currently at around 1.75), the spread will appreciate by over 8%...regardless of the direction of the individual averages. But our opinion is that the general direction will be down.

See the chart below ... and have a prosperous trading week!

Mike Paulenoff is author of the MPTrader.com ETF Trading Diary (www.mptrader.com), a real-time diary of his technical analysis on equity markets, futures, metals, currencies and Treasuries.

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