The dark green line in the lower panel of the chart measures the relative strength between the two. As the green line rises, it indicates that small-caps are outperforming on a relative basis, and vice versa – if the line is falling, large-caps are outperforming small-caps.
As you can see, small-caps have generally outperformed their larger counterparts for the past 10 years. However, what we’ve noticed lately is that after the strong move over the past year, the relative strength line is back near the previous highs it reached in 2006 and 2008.
It will be interesting to see if small-caps can break through these previous highs, which would be a bullish development and would likely mean more gains versus large caps going forward. On the other hand, after 10 years of outperformance, we’re also wondering if small-caps are in the midst in some sort of topping process, on a relative basis. After all, trends don’t last forever, and 10 years is a rather long time.
If small-caps can’t break through, it would imply that large-caps are finally due to take the lead, perhaps for awhile.
