Is the Small Cap/Large Cap Ratio a warning?
The ratio of SCXP (Stoxx600 small cap) vs LCXP (Stoxx600 large cap) has tracked the DAX for the best part of 3 years. In 2011, the ratio peaked about 2 months before the DAX declined 30%+ in just over a month (Chart 1). The DAX had been moving sideways for the most part of the year. The DAX has been moving sideways for the most part of this year. The small cap/large cap ratio has peaked and so far declined in isolation of the broad market, repeating the pattern witnessed in the US and UK. The back drop in 2011 was vastly different from today: a European Sovereign crisis, global PMIs rolling over, an end to QE and a US debt downgrade. However, the decline in the ratio maybe the smoke to a wider positioning fire.
Chart 1: Ratio of SCXP/LCXP vs DAX.