The most amazing part of the recent all-time highs in the US large cap indices (Dow, S&P) is that the small cap Russell 2000 has been undergoing a full blown correction (10%+) since the beginning of March. Is it possible that we are experiencing a unique market phenomenon consisting of a small cap only correction?

Click to enlarge

IWM Weekly

IWM_Weekly_5.17.2014

SPY Weekly

SPY_Weekly_5.17.2014

The following note from Citi a couple of weeks ago helps to explain the significant recent outperformance by large caps over small caps:

Small_caps_vs._large

The evidence thus far indicates that we have witnessed nothing more than a late-cycle sector rotation into more defensive sectors and a valuation correction in small cap US stocks after a blistering rally between November 2012 and February 2014.

Should the senior indices actually suffer a large tumble over the coming weeks, the armchair market pundits will point to the warning signs which have been numerous. However, as of now it appears that we are witnessing a small cap only correction in US equities.