Mid-Cap Stocks Stare Down Danger Zone

While the S&P has conquered a pair of round-number foes, the MID chart battle rages on

by Bernie Schaeffer

Published on Nov 12, 2019 at 7:52 AM
Updated on Nov 12, 2019 at 7:52 AM

Starting in early July, the S&P 500 Index (SPX) spent several long months churning sideways beneath a pair of round-number "pressure points" that proved extremely challenging to move past. The first of these was the "mega round" 3,000 millennium level, and the second was the 20% year-to-date return level at 3,008. Both of these were first taken out to the upside back on July 12, but it wasn't until as recently as Oct. 24 that the S&P finally began its big breakaway move from this duo's gravitational pull. The index has now strung together 12 straight daily closes above both the 3,000 and 3,008 levels, representing an encouraging show of technical strength to bolster the bullish case.

With that background in mind, it's worth digging into what happened with the S&P MidCap 400 Index (MID) this past week. The index reached a year-to-date high close on Tuesday, Nov. 5, at 1,999.33 -- squarely below the 2,000 millennium level, but narrowly above MID's own 20% year-to-date return at 1,995.65. Through the final three days of the week, though, the mid-cap index was able to close only as high as 1,998.39 on Friday, still sandwiched awkwardly between these "super round numbers."

In case you're wondering, it's a similar situation for the small-cap Russell 2000 Index (RUT), albeit on a somewhat smaller scale (appropriately enough). RUT ended Friday's trading just below the 1,600 century mark at 1,598.86, and up 18.6% year-to-date, a notch south of its own 20% return.

So while the S&P has marched boldly forward beyond a pair of psychologically significant round-number barriers, it's dragging the mid-cap and small-cap sectors along in its shadow. That's generally the inverse of what conventional wisdom dictates we'd like to see during rallies, with "small-cap leadership" being a perennial indicator of robust risk appetites among market participants.

As a counterpoint to that conventional wisdom, we'll refer you back to a small-cap underperformance study triggered by a signal back in early July. The results indicate that following a brief post-signal period of "business as usual" for small-cap stocks, this sector then goes on to outperform the broader S&P over the ensuing six-month and 12-month periods -- slices of time that take us out to early January and early July 2020, based on the most recent performance gap.

While that's certainly pleasant news for RUT enthusiasts, where does it leave the MID? The index's previous attempts to cross above the 2,000 level occurred in late January 2018 and again in August-September 2018 -- just ahead of bruising sell-offs for the broader equities market. And now through the end of the fourth quarter, this region carries additional psychological weight as the home to MID's 20% year-to-date return. In the short term, traders would do well to keep a cautious eye trained on what appears to be either an imminent breakout or a developing rejection at MID 1,995-2,000.

mid stock chart 2019

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, November 10.


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