Mid Cap StocksMid cap stocks are the middle section of the stock market. This designation is based upon the size of companies as measured by publicly held shares multiplied by share price. There are a number of price ranges used, $2 million to $10 million, $1 million to $5 million, and $750 thousand to $3.3 million, which is the range of companies included in the S&P MidCap 400.
Mid Cap stocks make up about 7% of the stock market based upon capitalization, or how much the publically owned and traded part of the company is worth. For investment purposes the investors and traders can break mid cap stocks down into mid cap value stocks, mid cap growth stocks, and mid cap momentum stocks.
Value stocks in this market range have a price to earnings ratio of up to 15 and a quick ratio 1.0 or more. Growth stocks have a price to earnings ratio of 1 or less and twenty five fold earnings growth over the previous five years. Mid cap momentum stocks have had a stock price gain of over 5% over the previous day’s close. A price to earnings ratio (PE ratio) is what it says, stock price divided by yearly earnings per share. A high PE ratio implies an overpriced stock. Low PE ratio implies a good stock for value investing. A quick ratio has to do with liquidity and the ability to meet short term obligations. It is a measure of a company’s financial strength. The ratio is current assets minus inventory and then divided by liabilities. In other words it is the total of assets such as accounts receivable and cash assets divided by debt. A ratio of 1 is typically considered OK by creditors.
An excellent index of mid cap stocks is the S&P MidCap 400 composed of 400 companies with market capitalizations of $750,000 to $3,300,000. This index is reconstituted yearly as companies enter or exit on either the top or bottom end. Mid Cap stocks have unique characteristics different from small cap stocks, large cap stocks, or mega cap stocks. Thus they require special attention when picking stocks and different investment risk attributes from the other parts of the stock market.
To be in the index a company needs to be American, four consecutive quarters with positive earnings per share, have a public float of over 50%, an operating company or REIT or business development company-not a holding company, and adequate liquidity and reasonable price, which means that the ratio of dollar value traded for the year over market cap must be at least 30%.
Although Mid Cap stocks have different characteristics from larger or smaller companies they are still amenable to the same kinds of stock analysis. Candlestick basics work on Mid Cap stocks just like all the rest. Part of the inclusion criteria for the S&P 400 is that these stocks have reasonable prices, as especially low stock prices tend to reduce liquidity thus distorting the ability of Candlestick charting techniques and other methods to predict the movement of stock prices.
Market Direction: Price movements are a reaction to investor sentiment. The obvious example can be seen in the past few weeks of the market move. A consistent upward trend all of a sudden had a hard break to the downside. This dramatic change of investor sentiment completely alters the outlook of most investors. The bearish sentiment will remain in progress until a strong candlestick buy signal revealed the Bulls were back in control. Evidence is required to confirm the Bulls are back in control based upon simple analysis of both the Dow and the NASDAQ. It is often asked why the Dow should be used when it represents so few stocks. The answer is relatively simple. The Dow stocks represent positions the big money institutions are most likely to have in their portfolios. These stocks represent the buying or selling indications of large money institutions. The NASDAQ represents a very broad scale of individual stocks. Having the ability to analyze market direction using candlestick signals, both indexes should be utilized when making an assessment of what investor sentiment is doing.
Although the Dow had just climbed up above the T-line over the past couple of days, the NASDAQ just barely nudged it yesterday. This is an important observation. Bullish confirmation would have been much more compelling had both indexes been able to close above the T-line. This morning's premarket futures, showing great strength to the downside, provided a very simple conclusion. The NASDAQ was not going to be moving above the T-line, a failure. The Dow, after forming a Spinning Top just above the T-line was now going to show selling back below the T-line. This would also indicate a failure of the uptrend. Realizing this failure would allow an investor to immediately add more short funds to the portfolio knowing the T-line had failed. The magnitude of today's selling stopped out numerous long positions.
What did today's selling indicate? The NASDAQ formed a Methods Falling Pattern. This makes for a prognosis of further downside. The markets already are in oversold conditions. But the assessment of more downside potential is based upon the Methods Falling pattern, a well-established continuation pattern.( Not all candlestick signals or patterns need to be memorized. A good practice is to skim through the secondary patterns every month or two just to be familiar with what might look like a pattern.) Having that knowledge makes adding to the short fund positions more comfortable. The past few days have seen the term "be nimble" in the morning and afternoon members comments. This is a simplified way to say be prepared to move positions very quickly. The gap down in the NASDAQ today should have instigated closing long positions that had started to get tired. Many investors find it difficult to close positions. Candlestick signals makes that thought process much more clear. It allows for very simple questioning. "Do I want to continue to hold this position if the markets appear to be selling off at this time?" If the answer is no, be prepared to close positions quickly once the market opens.
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