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Large-cap relative strength is a good thing

Large-cap relative strength is a good thing

| March 27, 2017

As the market experienced its worst week of the year, participants have begun to wonder if the so-called “Trump Trade” could be over.  A number of analysts are particularly concerned because they’ve noted that small cap stocks have not kept pace with their larger brethren in the first quarter, after strongly outperforming in 2016. 

According to a well-known market adage, a market is deemed healthy if the troops (small caps) are rising in tandem with the generals (large caps) – and is unhealthy if there is a significant divergence between them.    Market researcher Mark Hulbert decided to put the adage to the test and his results were surprising. 

As shown on the following chart, it turns out that the S&P 500 actually has had (on average) the best future 3-month performance when large caps have outperformed small caps by more than 5% in the trailing 3-months. So, that old generals and soldiers analogy does not hold up to at least this one statistical test.

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