This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

Global Macro: Large Caps' Leadership Signals Equity Weakness

NEW YORK (TheStreet) -- Large-cap stocks may begin to outperform small-cap stocks as investor anxiety increases in coming months. 

The indicator discussed in this article compares the strength of iShares Russell 1000 (IWB) over iShares Russell 2000 (IWM). Large-cap stocks tend to lead smaller-cap stocks when investors are anxious about economic conditions. The situation doesn't automatically mean equity indexes will decline, just that investor caution has pushed money into defensive sectors.

When small-cap stocks lead, it implies that investors are confident in the overall economy. They are more willing to take risks in riskier equity sectors, believing that strong financial markets will help companies both large and small.

Throughout 2013, equity indexes rallied at an exponential pace. Small-cap stocks showed relative strength the entire year, steadily climbing higher every quarter. Equity investors had little fear, knowing the Federal Reserve had a safety net below the market, deterring sellers from getting too bearish.

Things have changed, however, in 2014. The Fed has cut its monthly bond purchases by $20 billion over two consecutive meetings. Investors are no longer hopeful that central bank help will be there if things go wrong in the economy.

U.S. economic numbers have been mixed, as higher growth has come alongside a slow growing labor market. Investors are looking for a faster recovery if the Fed intends to remove stimulus completely by the end of the year.

Large-cap stocks, as well as safe-haven assets, have been bid higher, as investors slowly realize that they are on their own now. Over this past month, both the iShares Japanese Yen Trust (FXY) and iPath S&P 500 VIX ST Futures ETN (VXX) have shown strength. Emerging-market issues have been partially responsible for the rise, but investor caution surrounding the future direction of equity markets has played a role as well.

This all sets the stage for large-cap leadership in coming months. The relative strength indicator shows large-cap stocks forming a double-bottom reversal pattern. The pair is trading at its lowest level in five years, indicating oversold levels.

This coincides with equity markets trading at record highs, and beginning to show signs of breaking lower. Watch the future action of large-cap leadership as a signal that investors are cautious and moving funds out of higher risk investments.
IWB ChartIWB data by YCharts

At the time of publication the author had no position in any of the funds mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Stock quotes in this article: IWB, IWM, FXY, VXX 
Andrew Sachais' focus is on analyzing markets with global macro-based strategies. He takes into consideration global equity, commodity, currency and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

Follow @Macroinsights

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,424.85 +162.29 1.00%
S&P 500 1,862.31 +19.33 1.05%
NASDAQ 4,086.2250 +52.0640 1.29%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs