Mid-Cap Chart 'Non-Event' Points to Long-Term Gains, With a Caveat

MID held above its 200-day moving average last week, even as the SPX breached its own

The S&P 500 Index (SPX) rattled investors last Monday, April 2, by closing below its 200-day moving average for the first time in nearly two years. Lost in the sea of headlines about this benchmark trendline breach was the fact that the S&P MidCap 400 Index (MID) one-upped its bigger-cap counterpart by battling back to close the session above its own 200-day, despite the index's intraday dip beneath this closely followed moving average.

Perhaps the lack of interest in this technical feat is due to the fact that MID has kept in much closer contact with its 200-day moving average than the S&P 500 has in recent years -- including a close below this trendline as recently as Feb. 8, and a particularly dicey three-week stretch back in August and September where MID's 200-day briefly threatened to emerge as resistance. So in that regard, it's somewhat unremarkable that this trendline was touched at all by the mid-cap tracker, and Monday's successful close back above the 200-day would seem to solidify the "non-event" status of this occurrence.

But with big-cap, mid-cap, and small-cap indexes alike continuing to chop around their year-to-date breakeven levels, traders may find it informative to consider MID's historical tendencies following tests of its 200-day -- particularly given the rich sample size generated in recent years, relative to the broader S&P 500.

Looking back to the start of the current bull market, there have been 10 occasions where MID has traded below its 200-day moving average on an intraday basis after spending at least a month above it (with the latest signal occurring on April 2, as noted above). One month after a signal, MID's performance doesn't deviate too greatly from its "anytime" one-month performance, though the standard deviation of returns is somewhat elevated at 5.30%, versus 4.27% typically -- suggesting slightly higher-than-normal volatility immediately after a signal.

But looking out over the next three-month, six-month, and 12-month periods after an intraday breach of MID's 200-day trendline, the index outperforms its "anytime" average returns over every time frame. Perhaps most notable is the fact that MID has been higher 12 months after a signal 100% of the time, compared to 84% positive "anytime" returns.

That said, it's equally notable that the standard deviation of returns rises to 15.49% one year after a signal, which significantly outstrips the typical 11.19% over this time frame. So while the longer-term trend may continue to the upside for MID in the months and quarters ahead, traders should be aware that those gains are likely to arrive alongside heightened overall volatility.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, April 8.