Small caps often send quality risk-on--risk-off messages to big-cap stocks. The question, today is whether or not the small caps are sending a risk-off message yet again?
Below looks at the Russell 2000:S&P 500 ratio over the past 5 years, highlighting that the ratio could be at an important price point.
The ratio has been moving higher since earlier this year, reflecting that small caps have been performing better than large caps. Last year the same thing happened -- small caps were stronger than big caps -- and once the high was in and support was broken, the overall market struggled to move much higher.
Now the ratio is testing falling channel resistance at (1), near the apex of a steep rising wedge pattern.
Rising support is being tested at (2), which if broken, would send a risk-off message to stocks.
What this ratio does with resistance at (1) and support at (2) could have a big influence on the risk-on trade going forward. Keep a close eye on what small caps do here.