Mid-cap Stocks Lead the Broader Markets Higher

Thursday robust rally in the Dow Industrials was enough to push the large cap index through initial chart resistance. That’s a strong sign that the consolidative price pattern in effect since early December is being resolved on the upside. The Dow isn’t the only stock index breaking through resistance. So are mid and small cap stocks.

It is usually a very good sign when mid-caps and small cap stocks are leading large caps higher. The S&P 400 Mid Cap Index closed on Thursday at a new record high. The S&P 600 Small Cap Index climbed above two overhead peaks formed during January. A test of its December high appears imminent. Its relative strength line has been doing better than large caps since October and is also on the verge of a new high. That’s a good sign that large caps are turning up as well. The S&P 500 Large Cap Index ending just shy of its January intra-day peak at 2064. A move that resistance barrier now appears likely.

A big part of this week’s renewed optimism is the fact that energy stocks are finally showing signs of a potential bottom. They’ve actually been the week’s strongest sector. The daily bars show the Energy Sector SPDR (XLE) is trading above its 50-day average for the third consecutive day. To signal a more convincing bottom, however, the XLE needs to clear its late December peak near 8100. Its RSI and MACD lines are also showing improvement. The weekly bars show the XLE bouncing off a rising support line drawn under its 2009/2011 lows. That would be a logical spot for it to find a bottom. In addition, the week RSI line is stabilizing just above oversold territory near 30. A bottom in energy shares would hint at a bottom in crude oil, which would benefit the stock averages.