#$mid

A few ways to look at my chart above…

a) What bull market? No progress for any equity asset class in 18 months, lots of losses.

b) The fact that US stocks (large, mid, small, in the yellow circle) are essentially flat since last summer is just a consolation prize, I suppose.

c) The destruction to foreign equities and gold means lots of frustration.

d) Those saying that “markets” have run too far, too fast, have no idea what they’re talking about.

e) Earnings still matter after all. No earnings growth, no returns.

f) Thank god for buybacks. This would look materially worse without them.

g) During every secular bull market, there are years where stocks take a pause. This would be the charitable way of thinking about things.

The Mid-cap 400 is one of the more important market indexes that we look at. I tend to call them the “Jan Brady” of the major US Averages because they are often ignored in favor of either the Large-Caps or the Small-Caps. They’re stuck in the middle. But companies that fall in this category, with market caps between $2B-$10B can tell us a lot about the direction of US stocks as a group. Based on what we’re seeing, the Mid-Caps are telling us US Stocks should continue to hit new highs as a whole. Let’s break it down:

Since September, we’ve preferred to stay away from Mid-caps (See Sept 14th and  Nov 24th). We haven’t seen the point in getting involved after they hit our initial target and some consolidation seemed necessary. Well we’ve now gone nowhere over the past 6 months, which is not necessarily a bad thing. I think the fact that the Mid-Cap 400 has hung out up here digesting gains sideways, rather down through a downside correction is very healthy and a breakout is imminent.

Here is a daily Candlestick chart looking at this consolidation over the past several months. I see higher lows and higher highs with very well-defined overhead supply:

This is a name we want to own above all of this resistance. Above the December highs and there is nothing but blue skies. Our target based on this potential breakout would be up near 285 based on the 161.8% Fibonacci extension of the September/October decline. This represents about 6% of upside from current levels. I think we get a breakout soon and we want to be all over it.

MidCaps: 15-Year Relative Strength Breaking Down

Several months ago, we began noting relative breakdowns in key areas of the market. It started first in the bubbly, momo sectors of the market like biotechs and social media stocks. Then it spread to smallcaps. Now we can add another group to the list and it's a big one: midcaps. As displayed in the chart, midcaps have exhibited relative outperformance versus the S&P 500 since 1999. The uptrend line in that relative outperformance is now breaking.

On an absolute basis, the S&P 400 Midcap Index has suffered very little in the way of damage, except on a very short-term basis. It was at an all-time high as recently as the 1st of this month and is barely below the 50-day simple moving average, as of this writing. That is one of the benefits of "relative strength" analysis. It can provide advance warning that a move is pending, almost like looking into the future. If the relative breakdown is foreshadowing an absolute breakdown in midcaps, investors can take action before too much damage is done to their portfolio.

Of course, the crystal ball isn't always right. And often, like divergences, even if it is right it can be very early. Therefore, any pending midcap (or major market) breakdown does not have to be imminent. That good news, however, is likely diminished by the fact that, while the break down is just occurring now, midcap relative strength stopped improving some time ago. The S&P Midcap:S&P 500 ratio actually peaked in 2011. Therefore, the relative strength advance warning may already be several years in.

This week we presented a series of charts outlining how recent index highs pass the so-called market top “look test”. By that we mean that these indices reached, or are reaching, approximate levels that based on various backward and forward-looking charting analysis (primarily Fibonacci) project as logical topping areas. While markets rarely conform to such convenient behavior, given the convergence of multiple key levels on multiple indices, we thought it worthwhile to at least mention. In this era, it probably does not go without saying that we are not “calling” a top necessarily. We are merely pointing out the presence of these significant levels on various indices:

Russell 2000

Dow Jones Industrial Average

S&P 400 Midcap

S&P 500

The exception?: Wilshire 5000

Today's ChOTD in our series on how recent index highs pass the so-called market top “look test” focuses on the S&P 400 Midcap index (previously, we looked at the Russell 2000 and the Dow). Again, we are not “calling” a top but merely pointing out the presence of multiple key levels based on certain charting analyses (primarily Fibonacci) that are near, or are based off, the recent highs on various indices.

Notice how the recent S&P 400 high occurred at an area in close proximity to key levels according to two separate analyses:

61.8% Fibonacci Projection of the 2009-2011 rally

Measured Target Projection of the 2011-2012 ascending triangle

Additionally, like we did with the Russell 2000 and the Dow, by projecting where key future Fibonacci support levels would be based on recent highs we can, in a way, reverse-engineer a top. For example, given the level of the recent high in the S&P 400, future key retracement support sits at an important level:

38.2% Fibonacci Retracement of the post-2009 rally roughly lines up with the 2011-12 highs and 2013 breakout level

61.8% Fibonacci Retracement of the post-2011 rally roughly lines up with the 2011-12 highs and 2013 breakout level