Mid-Caps Muscle Up as Breadth Rotates Beneath the Surface

U.S. equity markets delivered a mixed performance last week, with gains in mid- and small-cap segments offsetting mild weakness among large-cap indices. While headline benchmarks such as the S&P 500 slipped 0.15% and the NYSE Composite fell 0.56%, mid-caps led the charge with the S&P 400 up 0.61% and micro-caps (IWC) rising 0.58%. The Russell 2000 gained 0.43%, showing quiet but broad participation under the surface. The Value Line average, which equally weights stocks, added 0.24% and further confirmed improving internals despite the flat tape.

The performance divergence across size segments points to early signs of a rotation. Large-cap indices, particularly those with heavy exposure to defensive and international names, underperformed as investors trimmed positions in quality and low-volatility stocks. The NASDAQ 100 held up relatively well (-0.02%) but was weighed down by narrow breadth, with only a handful of mega-cap names contributing to resilience. In contrast, mid-caps emerged as a relative strength pocket, boosted by gains in economically sensitive names and a rebound in Dow Transports, which rose 0.54%.

Breadth trends confirmed the evolving risk appetite. While the S&P 500 maintained a healthy 59% advancer rate, the NASDAQ Composite lagged with fewer than 40% of stocks advancing—a sign of narrow leadership. Small caps were mixed internally: the S&P 600 showed bearish breadth (only 43.7% advancing), but the broader Russell 2000 posted gains, suggesting that performance may have been driven by a handful of outperformers. Mid-caps stood on firmer footing with balanced breadth and solid gains across style factors.

Indeed, style factor performance revealed notable leadership from revenue-weighted and momentum strategies across all size tiers. Mid-caps were the top-performing group, with value (+0.57%), core (+0.61%), growth (+0.64%), and especially revenue-weighted (+1.06%) showing robust participation. Small-cap momentum (+1.04%) and revenue (+0.75%) gains also hinted at a growing appetite for risk, albeit with some hesitation. Large-cap defensives lagged materially, with quality and low-volatility strategies both posting negative returns.

Momentum indicators supported the short- and medium-term bullish thesis. The Keller Market Model showed all four major indices—S&P 500, Dow Jones, Russell 2000, and NASDAQ 100—in bullish alignment for short- and medium-term timeframes. However, long-term signals remain fractured. Only the NASDAQ 100 maintained a bullish long-term trend, while the S&P 500, S&P 400, and Russell 2000 continued to signal bearish long-term structures. This suggests that while the recent rally has gained traction, structural damage from prior drawdowns has not yet been fully repaired.

Moving average breadth analysis echoed this theme. Short-term momentum (20-day MAs) was mixed, with the S&P 100 and NYSE holding near 55% above average, while the NASDAQ and S&P 600 hovered around 42%. Medium-term (50-day) signals were stronger, especially for large-cap tech (NASDAQ 100 at 71%) and S&P 100 (76%). However, deterioration appeared at the 100- and 200-day levels for small caps and the broader NASDAQ, with participation slipping into bearish territory—underscoring the narrow and fragile nature of the rally.

The Bullish Percent Index (BPI) provided further confirmation of selective strength. Dow Industrials (76.7%) and Dow Transports (70%) entered very bullish territory, pointing to improving macro sentiment. The NASDAQ 100 (67%) and S&P 500 (66.6%) also maintained solid participation levels, but the broader NASDAQ and NYSE were stuck in neutral territory around 53%-57%. No major index registered a bearish BPI reading, suggesting underlying support remains intact despite the uneven tone.

Sector performance reflected a modest risk-on tilt. Cap-weighted leaders included Energy (+1.0%), Financials (+0.8%), and Technology (+0.57%), while laggards were concentrated in Health Care (-2.6%), Materials (-1.1%), and Consumer Discretionary (-0.5%). The decline in defensive sectors like Utilities, Staples, and Real Estate confirmed de-risking from interest-rate sensitive names. Equal-weight and small-cap sector proxies (not shown) likely saw stronger relative performance in cyclical sectors, reinforcing the rotation narrative.

Investor positioning appears selectively risk-on—favoring mid-cap cyclicals, growth names with momentum, and economically sensitive sectors—but the rally remains vulnerable given narrow leadership and weak long-term breadth. To support a durable advance, broader participation in small and mid-cap indices, as well as improvement in defensive and international segments, will be critical. For now, the tone is cautiously constructive, supported by improving internals and technical resilience in key benchmarks like the S&P 500 and NASDAQ 100.