I adopted a long large cap posture versus small cap entering May and so far it has helped a bit against the waterfall declines we saw in the markets. As the chart shows, that viewpoint is being confirmed (I basically use the same chart so this chart). It appears we have hit a turning point for the next 12 months as large cap stocks will start to outperform meaningfully overall small caps. Taking it one step further, I live value on the large cap side though my broker friend is saying growth is where is firm is going on the large cap side. I guess in this case it is the small guys (me) versus the big guy (the fund company)!
The one downside of this analysis is that risk taking will continue to take a hit leading to a more defensive posture in the marketplace. The previous three times this turn has occurred has led to market declines with a correction in 2006 and the crash in 2008. Previously, in 2004, markets became a bit overbought in this ratio and spent the next 1.5 years working off this conditions. Small caps really never gave up though and continued higher through 2006.
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