In the chart above we have the daily S&P500 (top) and the daily inverted S&P500 relative to the US small cap stocks index Russell 2000 Index (bottom). We notice that usually a relative strength of the small cap stocks is supportive for the uptrend of the large caps (blue chips) in the S&P as a sign of more risk taking in the markets. Since we have no divergence of the trends of both charts above, the uptrend in S&P seems to be healthy and poised to continue.
An example of a serious divergence we have in the same charts below but on weekly time frame. The uptrend in the relative strength of the small stocks ended in July 2006 and started trending down while the blue chips in S&P500 continued north in strong uptrend until January 2008. The underperformance of small stocks was an early important warning sign of the later strong reversal of the S&P500.
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