Trendline Trouble for Mid-Caps Requires Your Attention

Mid-cap stocks have surrendered their one-time leadership role in 2017

Aug 31, 2017 at 9:03 AM
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While it's not the kind of storyline that tends to generate a lot of headline ink, the outperformance by the benchmark S&P MidCap 400 Index (MID) has been remarkable over the long term. Using the SPDR S&P MidCap 400 ETF (MDY) as our proxy, the rolling 10-year return is hovering right around 100% -- easily besting comparable returns of 65% for the SPDR S&P 500 ETF (SPY) and 72% for the iShares Russell 2000 ETF (IWM).

Among the most widely tracked equity-based exchange-traded funds (ETFs), only the PowerShares QQQ Trust (QQQ) is showing up MDY with its approximate 195% gain (though the sector-specific focus of QQQ relative to MDY, IWM, and SPY makes this a somewhat skewed comparison). And narrowing our focus to a five-year lookback, we again find MDY leading the pack -- up 76%, versus SPY's 73% advance and IWM's 69% gain.

In 2017, though, the mid-caps have gradually surrendered their leadership role. Over the past six months, in fact, MDY is off about 1.5% -- significantly undershooting SPY's 3.4% rise. And while SPY has held steady above reliable support at its 80-day moving average amidst the recent market turbulence, MDY is threatening to lose its hold on a longer-term daily trendline.

Specifically, MDY has now closed five of the last seven trading days below its 200-day moving average, which is the fund's choppiest trading around this trendline since it was surmounted back in mid-March 2016. The initial break below the 200-day occurred during the Aug. 17 sell-off. Last Tuesday's close by MDY back above this moving average was followed by two more daily closes beneath it, before MDY finally managed to finish the week north of this suddenly troublesome trendline -- which, it should be noted, easily cushioned MDY's pre-election lows in early November 2016.

MDY's rough patch around its 200-day compares favorably to those of IWM, at least; the small-cap fund suffered a similar Aug. 17 break, but has since closed seven consecutive days below this moving average. What's more, MDY's ability to log a Friday close above this level is encouraging, as is the fact that the ETF didn't even fall low enough to test previous March-April support around $305.

So while we're not sounding a death knell for the mid-cap space, we would be remiss not to flag the recent turbulence MDY has endured around its 200-day moving average as a development worth monitoring. Looking back to late July 2015, a brief two-day streak of closes below this trendline preceded the sharp August stock sell-off that saw MDY trading down by roughly 5% just one month after the breach -- a bout of selling that wouldn't ultimately exhaust itself until the following February.

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Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, August 27.


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