EQUAL WEIGHT S&P 500 ETF IS ALSO NEARING A TEST OF ITS SUMMER HIGH -- AN UPSIDE BREAKOUT BY BOTH VERSIONS OF THE S&P 500 WOULD BE A POSITIVE SIGN -- RISING SMALL AND MID CAP STOCKS ARE GIVING A BOOST TO THE RSP AND MAY BE SENDING A POSITIVE SIGNAL
BOTH S&P 500 ETFS ARE NEARING OLD HIGHS...Chart 1 shows the S&P 500 SPDR (SPY) moving closer to a test of its July/September highs. It would take a close above its September intra-day high at 301.24 to put it at a record high. The SPY is based on the S&P 500 which is a capitalization-weighted index. As a result, the SPY is driven mainly by its largest stocks. Chart 2 plots the Invesco S&P 500 Equal Weight ETF (RSP); and it's not far from a new record either. The RSP needs to close above its September intra-day high at 109.72 to reach a new record. That may be the more important of the two potential upside breakouts. As its name implies, the RSP gives equal weight to each of its 500 stocks. That gives less weight to its largest stocks, and more to smaller stocks (which outnumber larger stocks). As a result, an upside breakout by the RSP may give a truer reading on the state of the stock market. That's why an upside breakout by the SPY needs to be confirmed by a breakout in the RSP as well because that would signal a broader advance. Another positive sign is that the equal weight version (RSP) has been rising faster of late than the SPY.
The upper box in Chart 2 plots a relative strength ratio of the RSP divided by the SPY. After falling for most of the year, the ratio bottomed in late August, rose through the first half of September, and formed a second (higher) bottom earlier this month. That shows the RSP doing better than the SPY over the last two months. The reason for that stronger performance by the equal weight version of the S&P 500 is because small and midsize stocks have been doing better than larger stocks since the end of August.
S&P 500 SMALL AND MID CAP INDEXES OUTPERFORM...Chart 3 below shows the S&P 600 Small Cap Index (SML) rising back over its moving average lines over the last two weeks. More importantly, the SML/SPX relative strength ratio in the upper box shows smaller stocks doing better than large caps over the last two months. That's not all. Chart 4 shows the S&P 400 Mid Cap Index (MID) doing nearly as well. And as their names show, there are 600 stocks in the SML and 400 in the MID versus only 500 in the SPY. In other words, there are twice as many stocks in the two smaller S&P indices. That's why it's usually a healthy sign when smaller stocks are doing as well or better than large cap stocks. And that explains why the equal weight version of the S&P 500 (RSP) has been doing better than its cap weighted version (SPY) over the past two months. Recent strength in domestically-oriented smaller stocks is a good sign for stocks; and may also signal more optimism on the U.S. economy.
TRANSPORTS OUTPACE INDUSTRIALS...Another sign of optimism may be coming from recent buying of transportation stocks. Chart 5 shows the Dow Transports climbing back above their moving average lines during October and nearing a potential test of their July/September highs. And they've been rising faster than the Dow Industrials during that period of time. The Dow Transports/Industrials ratio in the upper box rebounded from a new low for the year at the start of October to the highest level in five months. Dow Theorists like to see the two Dow Averages rising together which is something they haven't been doing for most of the year. Since the transportation stocks are more economically-sensitive than the Dow Industrials, their recent stronger performance could be viewed as another vote of confidence in U.S. economy as well as the stock market. An upside breakout by the transports through their July/September highs would be an even stronger signal. The same is true of small and mid cap stock indexes.
