We're in a Mid-Cap Rally

So is this the Santa Claus/year-end/super-bear rally we've been waiting for? The S&P 500 has just gained 18% in the past five trading days. "Does it have legs?" ask fund managers everywhere who are suffering from performance-anxiety attacks.

Well, we're currently in what I call a mid-cap rally, where mid-cap stocks outperform small-cap and large-cap stocks. Last time the mid-caps led the market we had a 70-day rally from March to May 2008.

Some say that the March rally had legs because it kicked off with a Lowry's 90-90 day on March 19th. However, the October rally had two 90-90 days on Oct 13th and Oct 28th; that rally turned out to be short-lived, lasting only 3 weeks. Clearly, 90-90 day was not the answer.

I recorded all the bear market rallies lasting longer than 1 day from both the 2000-2002 bear and the current bear.

Start	End	Length (days)	Leadership (overall)
10/10/2008	10/13/2008	3	Large-cap
7/23/2002	8/23/2002	31	Large-cap
2/6/2008	2/26/2008	20	Mid-cap
11/26/2007	12/10/2007	14	Mid-cap
3/10/2008	5/19/2008	70	Mid-cap
4/6/2001	5/18/2001	42	Mid-cap
10/27/2008	11/4/2008	8	Small-cap
1/22/2008	2/1/2008	10	Small-cap
7/15/2008	8/11/2008	27	Small-cap
10/17/2008	10/20/2008	3	Small-cap
12/17/2007	12/26/2007	9	Small-cap

Average large-cap bear market rally = 17 days
Average mid-cap bear market rally = 36.5 days
Average small-cap bear market rally = 11.4 days

It appears that the average mid-cap rally lasts longer than the average large-cap or small-cap rally. Does someone have an explanation for why mid-cap rallies last longer? Otherwise, it could simply be a case of curve fitting.

Comments

[GNL:]

MID caps need less money to manipulate.

2008 Nov 30 03:01 PM

[De Graaf:]

There are simply more mid-cap companies to invest in. A large spread of tiny amounts of investments altogether make a large sum of investment capital.

Especially considering the fact that large-caps are not really 'transparant' lately. CDO's, CDS', you name it. Let's get back to the root of investing. Buy stocks that you can read.

2008 Nov 30 04:12 PM

[Jackson Cash:]

Past performance is not indicative of future performance.

Invest in jobs and get rid of the Federal Reserve.

2008 Nov 30 04:28 PM

[bobdark:]

Do you really expect a 70-day rally with the economic factors out there? Isn't this rally sort of running on hot air?

2008 Nov 30 05:13 PM

[Anthony Alfidi:]

Daily market action is a random walk. SPY is just as likely to be down on Monday as it is to end the day up again.

2008 Nov 30 06:41 PM

[Jake2:]

Last week: S&P 500 +12.03%
Mid Cap 400 +16.51%
Sm Cap +15.29%
Pick 'em.

2008 Dec 01 12:18 AM

[David White:]

There is no doubt that the markets have rallied for the last several days. However, it is too soon to say that we are in any type of rally. The new $800 billion the government Tuesday said it would put into the credit markets has had a positive effect on them. The good feelings over this have had a positive effect on the market. However, it seems unlikely this is going to last until even Christmas. Not only the US automakers are complaining, but the Japanese automakers are having severe problems with sales in Japan. Most people think they make more saleable, more fuel effiecient cars. They are still having problems. How are the Big 3 US automakers going to present a plan for profitability to Congress? The answer seems to be that they won't be able to with the cuts they are currently envisioning. Further most of the recently announced job cuts (such as Citi's 75,000) have not occurred. Yet car buying is down severely. We will find out how severely on Tuesday. It only seems likely to get worse in the next couple of quarters. It seems likely Congress will tell Big 3 to go back to the drawing board again. This will cause further angst.

The news on the Christmas sales season is somewhat dismal too. People came out for Black Friday to get the big discounts. However, they did not stay for the weekend. Also everyone the news media interviewed said they had cut their budget to half or less of what they spent last year. This is terrible news for the retailers.

The commercial real estate markets are apparently now becoming a severe problem. The tenancy rates are down (both what is being charged and the percentage of available space filled). The buildings are just not as profitable. Plus most of the commercial loans are usually much shorter term. They often come due in 5 to 10 years (with a balloon payment). There are going to be a lot of defaults in the current economic environment. With the losses in appraised values, many will be unable to get new loans to cover the ballon payments. This could end up being a very serious problem indeed.

Finally the US credit crisis had a disastrous effect on Europe. However, now it is Europe's turn to return the favor. Apparently European banks are one of the major lenders to developing countries. With the current economic crisis, many of the loans to businesses in these countries are in serious trouble. There are likley to be many defaults. The European banks will suffer greatly. There is little doubt that this will significantly effect the US credit markets. The recent $800B may have stabilized our markets for the moment. However, they most likely will soon be destabilized again by their involvement with European banks in much the same way European banks were by US credit default problems. Of course, US banks have lent some money to developing countries also. They will have the same problem with their loans. I don't see a quick end to all of this. I am going to be surprised if the Christmas rally makes it very far into next week. The problems in the US are still significant. With the above mentioned developing country default problems on the very near horizon, the skies are darkening again. Even Trump is not paying his bills on time. That kind of thing can't be helping banks (credit markets).

2008 Dec 01 12:31 AM

[David White:]

I probably should have mentioned the 6+% decrease in the Durable Goods Orders economic data reported last week. Very few MidCap companies are going to thrive in that type of environment. The above mentioned credit problems likely mean we have not come close to the bottom of the market yet. It seems likely there are many more bad Durable Goods figures to come. How can MidCap stocks rally in that kind of environment?

2008 Dec 01 12:39 AM

[tipalia:]

this is all good but how about a few names? to me these articles are futile to the small investors without a few ideas.

2008 Dec 01 08:51 AM

[bobbobwhite:]

Ever hear of a bear market rally? That is what we are seeing now, and any comments to the contrary are ignorantly ill informed or are wholly specious in intent. Why are these guys still saying this junk unless they are getting well paid to confuse the issue?

All indicators are that this economic debacle, that took so long to unwind, will take a very long time to wind back up. No quick cures anywhere, and especially after just a few up-market days.

2008 Dec 01 01:37 PM

[stlouisray:]

the banks caused this crisis and crash with reckless levering; the banks have exacerbated the problem by hoarding the handouts given them and/or shipping it off to foreign countries; the banks now will kill off everything that is left with predatory consumer credit rates

maybe it is time to let these banks fail. it cant be much worse than it is already

2008 Dec 01 10:36 PM