Last week, Bruce Zaro says a series of surprisingly positive buy signals started showing up on his radar screen.

With stocks still tumbling and credit markets in a deep freeze, the portfolio manager figured such signs were simply a product of unusual levels of volatility.

But the performance readings gleamed from his database and customized set of charts haven't fluctuated. As a result, the chief technical strategist at Delta Global Advisors says he's confident enough now to start making plans to wade back into stocks.

Zaro isn't moving helter-skelter into everything, though. Instead, he's sticking to large-cap exchange-traded funds. In fact, Zaro says that mega-caps seem particularly ripe at this time. 

Conditions remain murky at best, he cautions. That means even though targeting blue chips is the safest way to go at this point, his research suggests that investors also need to be aware of differences in benchmarks tied to different large-cap ETFs.

Zaro has been doing comparison tests between equal-weighted indexes and those weighting holdings by traditional market-cap sizes.

In particular, Zaro has been studying backtested as well as actual returns for the underlying benchmarks of a pair of large-cap ETFs. Those are Rydex S&P Equal Weight (AMEX: RSP) and iShares S&P 500 Index (NYSE: IVV).

Zaro says he's found that from May 10, 2000 through Oct. 24, 2008, patterns of index returns represented by the equal-weighted RSP consistently outperformed those of IVV.

That is, until last week. Since then, that multi-year relative strength edge held by RSP's portfolio started to evaporate. Now, it has reversed course. 

That's significant, says Zaro, since the equal-weighted outperformance picture has been so heavily skewed towards RSP. In the past eight years through last week, RSP’s benchmark had returned a cumulative return of -4.77%, while IVV posted -36.82%, according to his data. 

More Than A Head Fake

Is it just a blip? “Typically, relative strength relationships we’ve studied like this with similar ETFs have stayed in place for two years. In this case, it stayed in place for eight years,” said Zaro.

Of course, there have been times when such indicators have gone awry. But Zaro smoothes short-term gyrations in returns by averaging them over several different time periods. In the case of RSP vs. IVV, returns were averaged over a monthly timeline.

"The last significant change we've seen before last week came in January 1991," said Zaro. "At that time, the data indicated cap-weighted S&P 500 tracking indexes started to outperform equal-weighted blue chip indexes. And that outperformance lasted nine years."

He added: "History would suggest we're on the cusp of a major transition to cap-weight from equal-weight indexes among large-cap stock ETFs." 

Since equal-weighted ETFs are often associated with portfolios emphasizing smaller-cap-sized stocks than the S&P 500 Index, Zaro believes that an apparent shift in market sentiment signals a broader move favoring large-cap names.

It's a theme that others have picked up on recently. (See related story here.) But the significance to equal-weighted funds is something that Zaro and his colleagues at Delta Global view as perhaps one of the first concrete signals investors can start to plan on these days.

"It's still too early because we haven't seen enough signs that the selling has abated and buying momentum had come in," he said. "But once the market has clearly turned, we're prepared to start moving client assets into cap-weighted indexes and away from equal-weighted index types of ETFs."

Delta Global is based in Huntington Beach, Calif. It serves mainly institutional investors, but it also has a private client group that serves high net worth individuals. Zaro and his research staff work from offices in Plymouth, Mass.

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