Chart of the Day - Tuesday, April 28th, 2020

Today’s Chart of the Day was shared on Twitter by David Zarling (@AdaptivCharts). It is a ratio chart showing the cap-weighted S&P 500 ETF $SPY, vs. the equal-weighted S&P 500 ETF, $RSP. When the line is rising, it means cap-weighted is outperforming equal-weighted and vice versa. Yesterday, the S&P 500 equal-weighted outperformed cap-weighted by the widest margin since 2009. David points out that this ratio has been in a well-defined range since early March, and it is now testing the lower bounds of that range. David also notes that momentum has been weakening over the past few weeks, as shown by the 14-period RSI indicator below. If this ratio breaks down from this range and confirms the bearish-momentum divergence, it means cap-weighted is underperforming equal-weighted. This would likely be an environment where the largest stocks like Apple, Amazon, Microsoft, Google, and Facebook underperform some of the Smaller-Cap stocks in the S&P 500, as these five Mega-Cap names make up over 20% of the cap-weighted index. Expect a resolution from this ratio in the next few days, as all five stocks mentioned above report earnings this week.