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Tickers in this Article: WMT, GE, GR, HSY
Small caps have been outperforming their large cap peers throughout the past several months, but over the past couple of weeks there has been a subtle shift back toward large caps. Typically, money rotates from sector to sector based on current investor sentiment. During periods of strong market performance, riskier asset classes such as small caps tend to outperform as investors seek maximum performance. During more volatile periods, investors seek safe places to invest their money such as Treasuries or large cap stocks with strong dividends. We mentioned in a recent article that there might be subtle rotation into large caps as investors seek to protect some of their recent gains. (For even more insight on this topic, check out Sector Rotation: The Essentials.) IN PICTURES: 7 Tools Of The Trade

The chart below shows a ratio of the Dow Jones Industrial Average as represented by the Diamonds Trust, Series 1 (NYSE:DIA) ETF and the Russell 2000 as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF. Notice the spike in late 2008 as investors fled to safety during the height of the financial crisis. While the general trend has been lower since that peak, there are short periods where money rotates back into large caps, as highlighted by the spikes in the chart below. Recently, the ratio started to tick higher after a strong period of outperformance by the small caps. While the markets remain healthy, this could be the beginning of a rotation back to safer investments.

Source: StockCharts.com


In looking at the chart for Wal-Mart Stores, Inc. (NYSE:WMT), the pattern resembles the same type of action we have been seeing in more volatile momentum stocks recently. WMT cleared a base in March and has been forming a flag above support for a couple of weeks. A move above $56 would be a bullish development and could signal a resumption of the breakout.

Source: StockCharts.com


General Electric Company Co. (NYSE:GE) is another stodgy old large cap that is forming a flag above a recent base. It cleared this base in March as well, and did so with an increase in volume. The $19 level marks the top of the flag, and a move above this level would also be bullish. If GE were to pull back from the flag, the $17 level would be an area to watch for support.

Source: StockCharts.com


Goodrich Corporation (NYSE:GR) also recently cleared a base and is forming a tight flag as it consolidates the breakout. While $72.80 marks the top of the flag, a close above $72 would take GR above the past nine days of trading action and could lead to a full-fledged breakout. The $67.50 level is the area to watch on a pullback for support.

Source: StockCharts.com


Following the theme from above, the Hershey Company (NYSE:HSY) is yet another large cap stock that is flagging after clearing a base earlier this year. HSY has had a very sharp move over the past month and this consolidation is needed if HSY is to continue trekking higher. HSY is trading in a very tight range between $42 and $43.50 and a move above this range would be bullish. The level to watch on a pullback is less clear as previous resistance spanned a broad area from $40-41 over the past several months.

Source: StockCharts.com


Bottom Line
It's interesting that many of these stocks are displaying similar patterns despite spanning several different sectors. The common theme is that they are all large cap stocks and performing very well. Often large caps are dismissed, particularly in a bull market as investors chase riskier asset classes. With so many small cap stocks over extended it may be time to start paying attention to large caps again. If the markets continue to march higher, these stocks will likely follow through on the existing patterns, and if the markets weaken, they should hold up better than their small cap peers. (For more, see Market Capitalization Defined.)

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The author does not hold a position in any of the companies mentioned above at the time of this writing.

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