Small Cap vs. Large Cap – Visualizing Risk Cycles & Rotation PoiWhat the Lines Tell Us:
1. Small Caps (Blue): Steeper rallies in bullish phases, sharper falls in corrections. Higher beta, higher reward, higher pain.
2. Large Caps (Red): More stable, smoother trends. Acts as a defensive harbor during market stress.
Now: The gap is wide again. Historically, this signals rising risk in small caps.
Correlation with the Ratio-Based Strategy:
- The Small-Cap / Large-Cap Ratio from my earlier post is essentially the vertical distance between these two lines.
- When the blue line runs far above the red (wide gap) → Ratio is high (>1.6) → Time to rotate to large caps.
- When the lines converge (gap narrows) → Ratio is low (<1.6) → Time to enter small caps.
Current Implication:
The gap is historically wide (similar to 2008, 2018 highs). This aligns with the ratio signal, reinforcing the move toward large-cap ETFs/index funds for capital preservation. Small caps will again shine—after the gap closes.
Takeaway:
You don’t need complex indicators. Sometimes, just watching these two lines and their separation tells you when to rotate—capture small-cap upside, hide in large-cap safety.
