The Jan Brady trade: Midcap stocks surge

Being smack in the middle can be hard. And maybe when it comes to stocks in the middle, the S&P 400 midcap index doesn't get as much attention as its large- and small-cap counterparts, the S&P 500 and the Russell 2000.

But on Tuesday, the midcap index hit an all-time high, having already seen a 13 percent rise this year, and could see further upside due to several fundamental and technical forces.

"This is a great sector; it's the overlooked middle child," Eddy Elfenbein, editor of the Crossing Wall Street blog, said Tuesday on "Trading Nation." He said that recent uber-low market volatility has encouraged investors to venture into "riskier sectors of the market."

This, in Elfenbein's eyes, has driven investors into high-yield bonds and, now, midcaps.

"That's why they've been doing well, and if you see the Russell and the small-cap indexes are still a long way from record-high territory. So right now I think the midcap is really at the sweet spot of the risk movement," Elfenbein said.

S&P Global defines midcap stocks as generally being "quite dynamic and not so large that continued growth is unattainable," distinct from large- and small-cap companies. The index's median market cap, according to S&P data, is about $3.57 billion.

The midcap index has flourished year over year from a technical standpoint, with more room to run, according to Evercore ISI's head of technical analysis, Rich Ross.

Ross, pointing to a chart illustrating what he calls a "classic bullish setup" of the MDY, the ETF that tracks the midcap index, said a technical analysis shows the index has found substantial support over the last year.

"All of that tells me that we probably go higher," Ross said. But he has a caveat.

The real estate sector, one element Ross deemed integral in the index's growth, is a new classification. It comprises 11 percent of the index, as opposed to making up just over 3 percent of the S&P 500.

Ross points out the REIT real estate ETF is up substantially, "so you're really getting a nice kicker there from the added real estate component."

The sector that carries the most weight within the midcap index, at over 17 percent, is information technology.

And though he likes midcaps overall, Ross cautions to watch for what changes the Federal Reserve may bring this year.

"Obviously we want to watch interest rates. If interest rates start to [go] back up; that [real estate sector] can turn from your best friend to your worst enemy very quickly."


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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