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Mid Cap Index Outperforming Both Small & Large Caps at Trader’s Narrative

Here’s an interesting chart comparing two slices of the US stock market:

midcap mid compared to large cap spx

In early April, around the time the stock market recovered from the March bottom, suddenly the Mid Caps (right axis) and the Large Caps (left axis) parted ways.

This is rather strange because they walked hand in hand for a very long time. I’m not sure why exactly. Even more puzzling, the S&P 400 Mid Capitalization Index (MID) also outperformed the S&P 600 Small Cap Index (SML) - not shown on chart.

Any ideas why the Mid Caps are hitting the sweet spot now?

The market does tend to go through drawn out cycles when the large caps and the small caps take turns leading.

Here is an updated chart of this relationship showing that maybe, just maybe, the small caps are about to regain the limelight:

ratio small cap to large cap SML SPX update 2008

And here is the same chart, this time comparing the Mid Caps to the Large Caps. No question here which is leading:

ratio mid cap to large cap MID SPX long term

As the Mid Caps and Small Caps battle it out, one thing seems clear, the big cap stocks look like they are the losers going forward. If you want to take advantage of this you can switch out of SPY into an ETF like Rydex S&P Equal Weight (RSP) (if you’re feeling like a hedge fund, short SPY and then go long RSP). Or you could just buy small cap or mid cap ETFs:

  • MidCap SPDRs (MDY)
  • Vanguard Mid-Cap (VO)
  • iShares S&P MidCap 400 (IJH)
  • iShares Russell Midcap (IWR)

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2 Responses to “Mid Cap Index Outperforming Both Small & Large Caps”  

  1. 1 paul

    Cool Observation, here are some thoughts:

    Some of the most successful Mid Caps become Large Caps. So many companies appear on all the sweet spots in all the charts. So these charts may be showing a historic economic cycle of a core group of companies having massive success becoming large caps (ie. technology companies).

    Sitting on MDY since 2000 would have been a good growth stock investment.

  2. 2 Babak

    Paul, that’s quite an insight. You think maybe the midcaps are large enough to be able to hit momentum and small enough to still have room to grow? could be something to that. Although, according to most data I’ve read the small caps represent the best return for risk over the long term. But that’s over a really long time, and the graph shows less than 15 years.

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