Until last month, the mid-cap S&P 400 was neck-and-neck with the large-cap S&P 500 index and well ahead of the Russell 2000. But recently, the mid-caps have started to trail the broader market. While not yet in correction territory like the Russell 2000, the mid-cap index is taking on the chin; it's down 4 percent in the past 30 days.
And if the charts are any indication, it's about to get worse.
"The best thing you can say about the mid-caps is, hey, at least it's not the Russell 2000," said Richard Ross, global technical strategist at Auerbach Grayson. While that may be the case, he points out, the S&P 400 still trails major market indices like the S&P 500, the Dow Jones Industrial and Transport averages, and the Nasdaq Composite index on a year-to-date basis.
Ross is particularly concerned the ETF that tracks the S&P 400 mid-cap index (trading under the ticker symbol MDY) began to form the beginning of a bearish double top pattern over the summer.
"That's a big problem," explained Ross, a "Talking Numbers" contributor. "When that comes at the tail end of a multiyear move like we've seen here in the mid-caps, that spells trouble."
But what also is problematic for the MDY, according to Ross, is that it broke below its 200-day moving average this week, the first time since November 2012.
"Now of course we've seen these buying opportunities before as we've tested and held that 200-day," Ross said. "But in this case, we're extending those losses… Should the mid-cap ETF remain below that long-term moving average for a matter of days – or a week perhaps – that's going to tell you that the bigger trend may have reversed to the downside."
Despite the selloff, however, one portfolio manager sees this as a buying opportunity. Erin Gibbs, equity chief investment officer at S&P Capital IQ Equity Research, thinks the under-loved mid-caps may soon shine.
Gibbs, who has over $13 billion in assets under advisory, recently published a study on the S&P 400 showing that the mid-cap index has done better than both the S&P 500 and the small-cap S&P 600 for much of the past 10 years on a risk-adjusted basis.
So while the S&P 400 index is down a lot this past month, Gibbs sees an upshot: The mid-caps just got cheaper.
"The relative outperformance of the large-caps recently is really because of global macro concerns and basically people shifting their assets into what they consider relatively safer global assets," Gibbs said. "However, the mid-caps have been able to hold at about 18 times forward earnings even while earnings growth continues to be ratcheted up."
Of course, that doesn't mean the mid-caps will outshine the broader market immediately. Instead, Gibbs believes it will take a three or four months while the market gets a better sense of the Federal Reserve's next move and while Europe tries to sort out its economy. Once that happens, she said, funds will flow back into mid-cap stocks.
"That's where we can really see the takeoff in mid-caps because they really do offer a significant amount of more growth with lower volatility," she added.
To see the full discussion on mid-cap stocks, with Gibbs on the fundamentals and Ross on the technicals, watch the above video.