A Recent Key Relative Strength Flip to Watch and a Quick Cap vs. Equal Weighted Sector Deep Dive
The recent rally has been led higher mostly by those areas of the market that accelerated lower throughout April. Growth focused areas have perked up quite nicely as the core of the market has showed some resiliency. The analyst team is typically quite interested in the relationship between cap & equal weighted assets. After all, knowing whether the “generals” or “soldiers” are in control can provide valuable insight into what areas might be strong at any point in time. If cap weight options are strong, then perhaps a prudent investment manager should focus on the more established names within a given sector. If the opposite is true, it might make more sense to spread the love across a host of different options rather than just a select few.
Starting broadly, we can focus on a key relative strength chart between SPX and SPXEWI. The chart below details the recent reversal back into X’s favoring SPX on a 1% chart, signaling a near-term preference for cap weighted names coming off of 2025 lows. In layman’s terms, this reversal computes to roughly 3% outperformance of cap-weighed SPX over equal weighted SPXEWI, and gives some general direction on what areas of the market have led the way to the upside. While more sensitive than our traditional 3.25% or 6.5% charts (due to the similar performance traits between the two indices) the 1% chart is consistent in its overall action. An investor who follows either a signal or column switching strategy (owning whichever asset is on a buy signal or column of X’s, respectively) between the two options bests a simple buy and hold portfolio of either asset on its own since the early 1990’s.
Drilling down further, we can compare tradeable representatives across each of the major sectors you may look towards in your portfolio. The table below breaks down the overall fund scores for said funds, highlighting those options with fund scores above NDW’s technically acceptable 3.0 threshold. Somewhat conversationally interesting is the rather uniform agreement across the sectors between their cap weighted and equal weighted counterparts. Said otherwise, there is no observed sector where the cap weighted option scores above 3.0 and the equal weighed option scores below, or vice versa. Notable cap weight standout Financials XLF outscores RSPF by nearly 1.50 points on our fund scoring system. On the other hand, equal weight Utilities RSPU bests XLU by roughly 1.25 points as of 5/15. All this to say, using the fund scoring system can help provide some color as to what areas of the market are showing strength underneath the hood, and whether it makes sense to pinpoint cap weighted strength or deploy more of a shotgun spray approach with equal weighted exposure in your allocation.
