Trading stock market relative moves

Several places have noted the difference in performance between small-caps and the S&P 500.  Let’s look:

Screen Shot 2014-10-03 at 13.56.04

Some say this indicates the overall top of the stock market: ‘small-caps lead the way’.  Others look at the situation another way – long-term correlations between the various US stock indices is very high (usually around 0.8-0.9 in the long term), so a trade is in order: long Russell 2000 versus short S&P or Nasdaq.

I’ll be testing this out with some of my favourite levered ETFs.

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