Increased lack of correlation between big-cap indices and small-cap indices

Discussion in 'Trading' started by xla, Aug 2, 2005.

  1. xla


    Anybody else notice the increasing lack of correlation between the big-cap indices (SP 500, Dow, Nasdaq 100) and the small-cap indices (Russell 2000, SP Small Cap 600, SP Mid Cap 400). I started noticing this about 6 weeks ago. The small-caps would take out a swing high, but the big-caps would remain below a swing low. Or the small-caps would rally intraday, but the big-caps would go sideways or be stuck in the lower part of the day's range.

    I know these indices will not always correlate 100% or even close to that. But they generally move in the same direction in somewhat similar degrees. Periods of blatant of divergence (intraday and multiday) would be the exception rather than the rule. For the past 6 weeks they seem to be the rule rather than the exception. Most notably, small-caps rally but big-caps don't. I even see this on a tick level intraday.

    Having traded both the ES and ER2 (and now just the ER2), I use the correlation of the various indices the help me enter and manage trades. If all indices are correlated, I will try to stay in the trade longer or even add to my position. If there is non-correlation or divergence, I will exit earlier or use smaller size. I find that I am now exiting a lot of trades prematurely. I have had to force myself to give less weight to the big-caps when I am in a position with the ER2.

    Maybe I should short the ES when I buy the ER2.:)

    Anybody else having a similar experience?