MIDCAP INDEX IS TESTING ITS 2005 HIGH AND MAY HOLD KEY TO MARKET DIRECTION

MIDCAPS HAVE BEEN THE STRONGEST ... Earlier in the week I showed the S&P 400 Mid Cap Index (MID) having already reached its March high. It's the first index to reach that important chart point. The MID/SPX ratio has been rising since the start of the year and shows that midcaps have done much better than large caps during the first half of the year. Chart 2 shows that small caps have been doing better than large caps since the start of May, but have underperformed for the year. Which brings us back to the midcaps. It's always a good idea to keep an eye on what market leaders do when they reach an important resistance level. And that's where the midcaps are right now. That being the case, the midcap index may hold the key to short-term market direction. If the MID is able to reach a new high, the rest of the market will probably follow along. If the MID backs off from its early March high, the rally in small and large caps may continue to stall as well. This is the first time in two years that midcaps have been the strongest group based on market size, and may suggest that the six-years of dominance by small caps is coming to an end.

Chart 1

Chart 2

Chart 3