Midcaps May Show Truer Picture of US Stocks


Several of my recent messages have focused on the divergence between large and small cap stocks. Wednesday's message suggested that part of that divergence was due to stronger foreign markets. Large cap multinationals do better when foreign markets are strong, which is the case at the moment. Small stocks are more closely tied to the U.S. economy. So which one is giving us the right story? Midcap stocks may be giving us the truest story of the state of the U.S. market. That's because they're right in between the two other extremes. So far this year, midcaps have gained 4% which is half as much as the S&P 500 gain of 8%. But it's still twice as much as the 2% gain in the Russell 2000 Small Cap Index (and 4% better than the S&P 600 Small Cap Index). And the midcap chart looks positive. The chart below shows the S&P 400 Mid Cap Index (MID) in a sideways consolidation pattern since its early March peak. In addition, the two converging trendlines look like a bullish "symmetrical triangle" formation. That increases the technical odds for an eventual upside breakout. That would broaden out the market uptrend which has been led mainly by large cap stocks. [Small caps are leading today's market bounce with the Russell 2000 regaining its 50-day average. That's encouraging if it continues].

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