Small Caps underperforming Large Caps

One indicator we use to assess the health of the stock market is a Small Cap vs. Large Cap ratio.  Small Caps peaked in April 2006 and underperformed Large Caps for two years, bottoming in January 2008. They then outperformed until October 2008, after which they headed straight south as the stock market bottomed in March 2009.  See below:

After the bottom in March 2009, Small Caps outperformed Large Caps until recently, peaking in May 2011.  They have generally underperformed since. 

Just as defensive issues have takes a lead on growth and discretionaries (see last week's blog), Small Caps (which tend to be associated with higher risk) have underperformed their larger, more defensive (and typically dividend-paying) brethren.  Be aware of this shift in market psychology when assessing market sectors and the stock market in general.

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