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Sizing up Size

April 11, 2019
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What We’ve Seen

The Relative Strength Index (RSI) measures the pace and magnitude of price changes on a scale of 0 to 100, and can help to identify the strength or weakness of price action over a defined time period. Traditionally, technicians consider a security overbought when RSI is above 70, and oversold when below 30. While small cap stocks led large caps out of the rally that began on December 24, they remain well below the September highs unlike large caps, which are close to regaining those highs even as recent gains may have slowed. The RSI for large caps shows the index flirting with the 70 level, and a sign of being overbought in the near-term. On the other hand, small caps have stand at a more reasonable RSI level of 60, making the case for some potential catch up. 

In addition, the percentage of both large and small caps trading above their 200-day moving average bottomed on December 24th at 9% of members across the size spectrum. Today, the percentage of small cap stocks above their 200-day moving average stands at 42% compared to 69% for large caps, highlighting greater breadth for large compared to small caps of late. The increased selectivity across small caps has driven the greatest difference among stocks trading above their moving averages since the end of September 2014. Subsequent performance over the next three and six months, saw small dominate large by 4.85% and 7.91%, respectively.

Large Cap RSI is Approaching Overbought

Source: Bloomberg Finance, L.P., FTSE Russell, as of April 9, 2019. Large cap is defined as the Russell 1000 Index and small cap is defined as the Russell 2000 Index. One cannot invest directly in an index.

Money in Motion

  • Relative rolling 2-month flows between large cap ETFs and small cap ETFs are hovering right above their three-year average, indicating that the current allocations investors are making between large and small caps are not stretched in either direction. As recently as early March, flows were tilted in favor of small caps breaching -1 standard deviations of the average.
  • However, these moves pale in comparison to the sizable moves in favor of each group that occurred in 2018. First, investors moved sharply in favor of large caps and then away from them following the volatility event in early February of that year. Unless we see flows continue to trend toward large caps, positioning is not offering much insight as of today. 

Relative Flows are Hovering Around Their Three-Year Average

Source: Bloomberg Finance, L.P., as of April 9, 2019. Data represents the relative net flows of U.S.-listed U.S. large cap ETFs and U.S. small cap ETFs specifically targeting exposure to U.S. large cap and U.S. small cap stocks, respectively. For example, when the blue line is positive, U.S. large cap stocks gathered greater flows than U.S. small cap stocks. On the other hand, when the blue line is negative, U.S. large cap stocks gathered less flows than U.S. small cap stocks.

What’s Next?

As noted in our February 6th Spotlight eNewsletter, the dovish shift by the Federal Reserve offers small Caps greater flexibility with regards to managing their balance sheets, many of which look increasingly stretched to some investors due to their buildup of debt post the Global Financial Crisis. However, traditional warning signs of stress for small caps, whether it be stock market volatility, leveraged loan performance, or high yield credit spreads, are all relatively sanguine.

At the same time, valuations remain attractive for small caps relative to large, with small caps trading below their 3 and 5-year average multiples, while large caps are above those averages. Even so, investors remain skeptical considering small caps are trailing carge by 4.17% since the beginning of March. This is likely driven by investors and their mixed perceptions of the relative earnings outlook, which has tilted in favor of large caps at the end of February and have continued trending negatively. 

Small Cap Multiples are Below their 3 and 5-Year Averages

Price to Sales (x)Large CapSmall Cap
3-Year Average2.031.19
5-Year Average1.921.20
10-Year Average1.621.07
Long-Term Average1.571.00

Source: FTSE Russell, as of as of April 9, 2019.

Implementation Ideas

  • For investors expecting corporations to top estimates in the upcoming earnings seasons, the Direxion Russell Small Over Large Cap ETF [RWSL] offers investors a way of gaining greater exposure to Small Caps relative to Large Caps,  especially considering their valuation advantage.
  • With economic growth showing some signs of bottoming, but far from being an all clear signal, the Direxion Russell Large Over Small ETF [RWLS] allows investors to move up in cap significantly thanks its amplified to Large Cap stocks at the expense of Small Caps.


  • Russell 1000® Index: The Russell 1000 Index consists of the largest 1,000 companies in the Russell 3000 Index, which is made up of 3,000 of the largest U.S. companies.
  • Russell 2000® Index:  The Russell 2000 Index is comprised of the smallest 2,000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at A Fund’s prospectus and summary prospectus should be read carefully before investing.

Direxion Relative Weight ETFs Risks - Investing involves risk including possible loss of principal. The Funds’ investments in derivatives may pose risks in addition to, and greater than, those associated with directly investing in or shorting securities or other investments. Investing in, and/or having exposure to, small and/or mid-capitalization securities involves greater risks and the possibility of greater price volatility than investing in larger, more-established companies. There is no guarantee that the returns on the Funds’ long or short positions will produce high, or even positive returns and a Fund could lose money if either or both of the Fund’s long and short positions produce negative returns.  Please see the summary and full prospectuses for a more complete description of these and other risks of the Funds.

Distributor: Foreside Fund Services, LLC

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