Why Traders Should Meddle in Midcaps
For some investors, middle cap stocks represent a sweet spot between the security and relatively low volatility of large cap stocks and the growth potential of small caps. When it comes to short-term trading, many of these mid cap stocks provide the same value, allowing traders and more active investors to trade stocks that are often more stable than the small caps, but still have the ability to “zip” like lower cap stocks have a tendency to do.
What are these midcap stocks? Stocks like KB Home (NYSE: KBH), which was among the leading stocks of the S&P 400 Midcap Index on Wednesday, rallying by nearly 12% to close above its 200-day moving average for the first time since late March. Another well-known midcap is Office Depot (NYSE: ODP), which finished higher by more than 7% ahead of trading on Thursday.
This strength in midcap stocks is what’s behind the overbought conditions and exceptionally low ratings in midcap-based exchange-traded funds like the Vanguard Mid Cap ETF (NSYE: VO) and the iShares S&P MidCap 400/Barra Growth Index Fund ETF (NYSE: IJK), both of which have closed in overbought territory below the 200-day moving average for the past three days in a row. Overbought levels in both funds have been areas where traders have been more likely to sell – or sell short – than buy.
Examples of these overbought sell-offs can be found as recently as early December, when an advance that ended with three out of four closes in overbought territory led to selling for six out of the following seven trading days, and a loss of more than 5%.
In addition to these overbought midcap stocks and exchange-traded funds, there are some midcap stocks that are pulling back to levels where buyers have historically come off the sidelines and into the market aggressively, at least in the short-term. These midcaps include JetBlue Airways (NASDAQ: JBLU), which sold off by more than 4% in trading on Wednesday, and Smithfield Foods Inc. (NYSE: SFD). Shares of SFD pulled back by well over 2% in Wednesday’s session, and have finished lower for four out of the past five days.
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David Penn is Editor in Chief of TradingMarkets.com.