Some long-term trends
My regular weekly market review will come out tomorrow as usual, but I wanted to do a quick post on small-caps. The long-term charts are looking very interesting.
The S&P 500 equal vs. cap weight ratio is in the process of making a major breakout. This is a sign of risk-on.
Here’s US small-caps relative to large-caps going all the way back to 1925. We see that this ratio trended higher until the early 80s. But for the past 40 years, it has been forming a large base.
Note: The above ratios may be telling us more about sector exposure rather than company size. For example, in the above chart: Financials, energy, materials, and industrials make up 45% of the small-cap index and only 25% of the large-cap index. Still interesting trends.
For what it’s worth, the forward P/E on small-caps is near multi-decade lows, and substantially lower than the large-caps. Also, the forward earnings yield is > 8%, a fair bit higher than the current 10-year Treasury yield which is 2.7%.
On a shorter-term, IWM bottomed on May 11th - a week before SPY’s May 19th bottom. We’ll look at bullish setups within the broader market tomorrow.
Could we see small-caps outperform for many years? We’ll simply follow the price action.
Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.