When looking at Relative Rotation Graphs showing large-cap sectors and small-cap sectors, we usually see rotations for the various sectors that are more or less in line with each other. That's not surprising, as the small companies are active in the same sector as their large counterparts. Sometimes, we can spot subtle differences with one or both starting to turn earlier than the other one, etc. But the big picture, in terms of rotation, is usually similar in nature.

While checking both RRGs, large and small, side-by-side earlier this week, I noticed some serious differences between the same sector in large vs. small. I am going to print the large-cap and small-cap versions of each sector (except Real Estate and Communication Services as they have no small-cap equivalents) together with $SML (S&P 600 Small-Cap Index) and see if we can extract any meaningful information.

These RRGs are so-called "Double Benchmark" RRGs (see this article), which means that there are two benchmarks on this plot. In this case, SPY is at the center of the chart and $SML is positioned relative to SPY. We can now also determine the rotation for the small-cap equivalents against their own benchmark by drawing an imaginary crosshair through $SML and observing where the tails are positioned.

Consumer Discretionary

The tails for Consumer Discretionary are showing a similar rotational pattern. However, XLI is inside the weakening quadrant and aiming for lagging, while PSCD is already in lagging and heading deeper into it, both against SPY AND against $SML. Both tails are suggesting further weakness for this sector in their respective market segments.

Consumer Staples

The defensive Consumer Staples sector continues to do well in both segments. XLP is shooting deeper into the leading quadrant while PSCC is inside leading but starting to roll over slowly. This suggests that large-cap Staples are the better bet for the moment.

Energy

In both segments, the tails for the energy sector are at a strong heading. XLE is clearly inside the leading quadrant and rapidly traveling further up on both scales. PSCE against $SML is about to return back into the leading quadrant from lagging/weakening which, we know, is usually a strong rotation.

The Energy sector is expected to remain strong in both the large- and the small-cap segments.

Financials

Financials are showing two interesting tails. XLF is inside the improving quadrant and heading for leading at a strong RRG-Heading. PSCF is much stronger in its own right against $SML on the RS-Ratio scale than XLF, and is hooking back up to leading. This suggests a preference for small-cap financials over their large counterparts for the moment.

Health Care

The Health Care sector is one of the sectors where the rotations for large- and small-cap are strongly diverging. XLV is inside improving and moving towards leading at a strong heading, in a way fulfilling its role as a defensive sector.

PSCH, on the other hand is deep inside the lagging quadrant against both $SML and SPY, traveling at a weak heading. This very clear dispersion in rotations points to a strong preference for XLY over PSCH.

Industrials

Another sector where bot tails are strongly diverging is the Industrials sector. XLI is inside the improving quadrant and at a strong heading. PSCI, on the other hand is traveling at a negative heading and inside the weakening quadrant against $SML, and already inside the lagging quadrant vs SPY. The clear opposite rotations and RRG-heading for both tails suggest much more strength for XLI and weakness for PSCI.

Materials

Materials is the third sector where a divergence in the rotational patterns can be detected, albeit a lot less strong than for Healthcare and Industrials. XLB recently moved into the leading quadrant, but has already started to lose relative momentum, making it less attractive. PSCM is also inside the leading quadrant against $SML and heading towards leading vs. SPY. The main differentiator here is the strong heading for PSCM vs. the tail of XLB, which is already rolling over and starting to head South.

Based on the stronger heading, PSCM is preferred over XLB.

Information Technology

The rotations for the two Technology tails are almost identical, both segments at a negative heading. XLK is already inside the weakening quadrant, while PSCT against $SML is about to cross over into weakening. At the end of the day, Technology is weak in both segments and more weakness seems to lie ahead.

Utilities

Finally, the Utilities sector is rotating strongly into the leading quadrant in both segments. XLU is a bit further ahead, but PSCU is now crossing over into leading vs. $SML and will likely follow in the footsteps of XLU.

Conclusion

The defensive sectors of Utilities, Staples and, to a lesser extent, Healthcare continue to improve and get stronger and stronger from a relative point of view. And that situation continues to flash warning lights and send risk-OFF signs for the S&P 500.

The comparisons above suggest that the large-cap segments of those defensive sectors are the better place to hide.

#StaySafe --Julius