Breadth Divergence Between Large and Small Caps Continues to Widen

by Bespoke Investment Group

Whenever the major market indices have a big move in either direction, it often helps to look at the breadth of their underlying components in order to gauge the health of the rally or the decline. In early May when the small cap Russell 2000 hit a new high, we noted that cumulative breadth in the index had yet to hit a new high, thus not confirming the rally to new highs. Unlike the Russell 2000, breadth in the S&P 500 did hit new highs as the index itself also rallied to new highs.

In the chart below, we have updated the cumulative breadth for both the S&P 500 and Russell 2000. As shown, breadth for both indices is off of its peak levels. However, the downtrend in breadth that is forming for the Russell 2000 is considerably more well-defined than the S&P 500. Whether or not the S&P 500 follows the lead of small caps is unknown, but until the pattern for small caps changes, investors would be best served staying away.

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