The Battle Over the Small-Cap Premium

Here’s an important but subtle point about the current market — the stock market has become increasingly divided along the lines of market cap. Each day’s market has the small-cap sector either leading or lagging the rest of the market by a considerable margin.

There’s usually a gap between big- and small-caps, but not like what we’re seeing now. I want to be clear that I’m not saying that small-cap volatility is increasing; rather, the volatility of the small-cap premium has increased. That’s an important distinction.

Here’s a chart showing the daily changes in the RUT/SPX Ratio. That’s the Russell 2000 divided by the S&P 500.

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In any given market, there’s usually a fault — the sector or style that the market is battling over. Sometimes it’s risk, other times it’s cyclicals. Now it appears to be over cap size.

Posted by on May 20th, 2014 at 10:45 am


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