As part of our regular market review in the DP Alert, we have begun to notice a very good indicator to determine market weakness and strength. It may not be new to all of you, but we've found as of late that this indicator tells a story.
We have been tracking the relative strength of the SPY to equally-weighted RSP. When the relative strength line is rising, it means that mega-cap stocks are leading the market. When the relative strength line is falling, mega-cap stocks are taking a back seat.
The chart below shows you what happens when the mega-caps start to slide against RSP. The market itself usually travels lower (as does equal-weight RSP). It doesn't happen every time, but it happens enough that we should be checking this chart regularly. If you are an Extra member or above with StockCharts.com, you can click on this chart and save it to your own ChartList for monitoring.
Currently, mega-caps are underperforming RSP, which has spelled trouble for the market. It did tip upward Friday, but ultimately the relative strength line is in a declining trend. We'll want to watch for a move out of that.
Conclusion: Cap-weighting has made it important to monitor how the SPY is performing in relation to equal-weight RSP. A declining relative strength line is bad for the market as a whole, and that is what we are currently seeing.
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