Here’s an interesting chart comparing two slices of the US stock market:
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:
And here is the same chart, this time comparing the Mid Caps to the Large Caps. No question here which is leading:
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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