Whenever you talk about which sectors of the market are working, market cap is one aspect that is usually overlooked.  Additionally, with breadth in the market becoming narrower these days, the market has been more discerning between winners and losers.  With this in mind, checking out where each sector stands on a relative basis helps to give a clearer picture of where things stand.  In the charts below, we highlight the relative strength of each S&P sector compared to its corresponding index across all three market cap levels (S&P 500 large cap, S&P 400 mid cap and S&P 600 small cap).  For example, in the Consumer Discretionary sector we compare the performance of small cap Consumer Discretionary stocks to the S&P 600 Small Cap Index.  Rising lines indicate that the sector is outperforming its index while a falling line indicates that the sector is underperforming.  As you will see in the charts, relative strength normally moves in the same direction across all three market cap levels, but there are times when they diverge, and these divergences can be a sign that a turn is coming.

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Relative strength in the Consumer Discretionary sector has been very interesting in the last year.  In the second half of 2014 and early 2015, we saw big dispersions across market cap ranges with mid and small caps outperforming by the widest margin while large caps lagged.  In the last several weeks, though, we have seen the divergences completely collapse and now all three market cap ranges are outperforming their respective indices by comparable amounts and their widest margins of the year.  Relative strength in the US economy, improving housing, and falling energy prices have clearly been positive for the sector.

In the Consumer Staples sector, there have been notable divergences in relative strength between market cap ranges.    While all three market cap ranges are outperforming their respective indices, mid caps are outperforming by the widest margin.

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Energy has been a disappointment for some time, but recently it has been even worse.  After last year’s collapse, the relative strength of the sector was rangebound for close to six months.  In the last several weeks, though, relative strength has broken down to new lows.  As one might expect, small caps, which tend to be the most leveraged, are underperforming by the widest margin, followed by mid and large caps.  None of the market cap ranges are holding up particularly well, though.  As mentioned above, while falling energy prices have been a positive for the Consumer Discretionary sector, stocks in the Energy sector have predictably seen the opposite reaction.

The Financial sector has seen a major positive reversal in the last two to three months.  As recently as April, all three market cap ranges were slightly underperforming their respective indices.  As the above chart illustrates, though, stocks in the sector have gone nearly parabolic on a relative basis.  With US economic data improving and Fed rate hikes now showing up on the horizon, investors are flooding into the sector.

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We may sound like broken records here, but no matter what the market cap, stocks in the Health Care sector are outperforming their respective indices by the biggest margins of the last year.  Driven by an aging population, the Affordable Care Act, and innovation in the biotech sector, Health Care has several growth drivers at its back, and investors have taken notice.

Mid cap stocks in the Industrials sector are underperforming their peer index by the widest margin in the last year, but the real weakness recently has been in large cap Industrials which are now underperforming their peer indices by the widest margin in the last year.  Stocks in the Industrials sector generally have a lot of exposure to international markets and large cap stocks in the sector tend to be the most exposed.

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Like the Energy sector, stocks in the Materials sector have all broken down to new lows on a relative basis.  Like the Energy sector with oil prices, the sector’s exposure to weak commodity prices has really been a hit to margins.

The Technology sector has increasingly been a story of the haves and have-nots in the last few weeks.  While both small and mid cap stocks in the sector saw their relative strength peak a few weeks ago, large cap stocks in the sector are near their highs of the year on a relative basis due to strength in stocks like Google (GOOGL), Facebook (FB), and up until yesterday, Apple (AAPL).

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Both the Telecom Services and Utilities sectors are underperforming their peer indices over the last year.  The major reason behind the underperformance for both sectors has been dividend yields.  As interest rates have risen and the prospect of higher rates intensifies, investors have been fleeing the sector en masse.

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