Sunday, April 02, 2006

Mid Caps Outperform Large Ones: What Next?

Here's an interesting development: In the past eight trading sessions, the Dow (DIA) is down by -.89%, but the Midcap stocks (MDY) are up 2.39%. Going back to March, 2003 (N = 770), I could only find 13 occasions in which the Dow was down more than a half percent on an eight-day basis, but Midcaps were up by more than one percent.

I then looked at what happened in the Dow and Midcaps eight days later. The Dow was up by an average of .31% (8 up, 5 down)--not far off its average eight-day gain of .41% (441 up, 329 down). The Midcaps, however, were down by an average of -.36% (4 up, 9 down)--much weaker than their average eight-day gain of .74% (484 up, 286 down).

What this suggests is that when mid caps have outperformed large caps on an intermediate-term basis, the large caps have tended to outperform eight days hence. We're thus seeing reversal not only among individual trading instruments, but among the relationships between these. This may be relevant information for long/short (spread) trade ideas.