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More Mega Cap Dominance?

January 14, 2025

Whenever the market enters a corrective wave, regardless of the magnitude and time, section rotation comes into play.

While we haven't seen any signs of defensive rotation yet, there's movement beneath the surface worth paying attention to.

The chart of the equal-weighted S&P 500 $RSP relative to the market-cap-weighted S&P 500 $SPY can provide valuable insights. 

It gives us a read on future leadership trends and helps guide how we position ourselves in various vehicles and themes.

The SPY is dominated by mega-cap tech stocks, while RSP, with its equal-weight structure, provides a broader market picture with greater exposure to cyclical sectors like Industrials, Materials, and Financials.

The RSP/SPY ratio is currently testing a key support level that was last seen during the Great Financial Crisis. If it holds, it could mark the start of a shift from mega-cap dominance to an environment where we want to look down the cap scale a bit more.

A bounce here could signal rotation into cyclicals, while a breakdown would suggest continued mega-cap leadership and a concentrated market posture.

I’ll be sure to follow up once we have an answer.

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Alfonso

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