S&P Midcap Trading Strategy (S&P 400 Index) — What Is It? (Backtest And Example)

Last Updated on October 12, 2022

Stock indexes are widely used as benchmarks for tracking a basket of stocks within a particular sector or segment of the market. Investors use the indexes to assess the overall health of the sector, they compare the performance of their own holdings, or they simply have a sector trading strategy. In this article, we look at a S&P Midcap trading strategy.

The S&P 400 index is a stock index that tracks the performance of 400 mid-sized companies in the US stock market, reflecting the distinctive risk and return characteristics of this market segment. The index was formed in 1991. Stocks in this index have a capitalization between $3.6 and $13.1B.

To know more about the S&P Midcap 400 index, read along.

What is the S&P 400 Midcap index?

The midcap index is a stock index that tracks the performance of stocks that qualify as mid-cap companies — stocks with a market capitalization between $3.6 and $13.1B. There are several indexes for tracking mid-cap stocks, including the S&P Mid-Cap 400, Russell Midcap, and Wilshire US Mid-Cap Index. But the most widely referenced is the S&P Mid-Cap 400.

Formed in 1991, the S&P 400 measure the performance of 400 mid-sized companies in the US stock market, reflecting the distinctive risk and return characteristics of this market segment. The index, which is very different from the S&P 500 index, provides investors with a benchmark for mid-sized companies.

For a company to be added to the index, the following criteria must be fulfilled:

• The company must be based in the United States.

• Be listed on a stock exchange.

• Must possess a minimum investable factor of 0.10.

The index is market-cap weighted, meaning that companies which more valuation will have a larger impact on the index. The index is recalculated and balanced in real-time quarterly in March, June, September, and December.

The 5 largest holdings in the midcap index

1. Molina Healthcare, Inc. (MOH) This is a healthcare provider offering managed health care services to low-income families. It is subdivided into four segments namely Medicare, Marketplace, Medicaid, and Other. As of December 31, 2021, it serves about 5.2 million members eligible for Medicaid, Medicare, and other government-sponsored healthcare programs in 18 states. Molina Healthcare has a total market cap of $18.58B as of July 28, 2022.

2. SolarEdge Technologies, Inc (SEDG). SolarEdge Technologies Inc. designs and sells inverters, communication devices, and most smart energy management solutions to customers across the globe. Its market cap as of July 28, 2022, is $18.56B.

3. Bio-Techne Corporation (TECH). The company develops and manufactures instruments, life science reagents, and services for diagnostics, research, and bioprocessing markets across the world. The company’s operations are subdivided into Diagnostics & Genomics, and Protein Sciences. As of July 28, 2022, Bio-Techne has a market cap of $15.04B.

4. Fair Isaac Corporation (FICO). This is a tech company that offers a wide range of software solutions to companies around the world. It designs and develops software, analytics, and data management products and services that enable businesses to enhance, automate, and make good business decisions. Its operations are divided into two segments namely Software and Scores. As of July 28, 2022, the company has a market cap of $11.60B.

5. Cognex Corporation (CGNX). This company offers machine vision products to customers around the world. These products are used for tracking, identifying, inspecting, and locating items like mobile phones and automobile tires during their manufacturing processes. The company’s market cap as of July 28, 2022, is $8.74B.

However, by the time you read this article the components might have changed. The stock market is extremely dynamic and companies come and go. To understand the significance of this, please read Hendrik Bessembinder’s pretty interesting report from 2017 that made the headlines in all financial magazines:

• Do Stocks Outperform Treasury Bills?

If you are a trader or investor, we strongly recommend reading this post! The answer is probably not what you expected.

S&P 400 Midcap index ticker code

The S&P 400 Midcap index has the ticker code MID.

S&P 400 Midcap ETF ticker codes

The most liquid S&P 400 Midcap ETF is IJH (managed by Invesco). It has been traded since the summer of 2000 and the average daily volume is close to 1 million. Another ETF that tracks the same index is SPMD.

There is also an ETF that tracks the S&P 400 Midcap equal weight index (EWMC). We have not backtested the performance of EWMC compared to IJH, but in a previous article we looked at the S&P 500 equal-weighted vs S&P 500 market-weighted performance:

• S&P 500 Equal-Weight Trading Strategy

The equal-weighted index has performed the market-weighted one for many decades, most likely due to the smallcap-effect. The effect might be the same in the Midcap index.

S&P 400 Midcap futures contracts

At the CME there are two S&P 400 Midcap futures contracts: the standard and the e-mini. The ticker code for the mini-contract is EMD.

S&P Midcap Trading Strategy

Let’s go on to backtest some specific trading strategies. Can we expect the midcap index to perform much the same as the S&P 500? Our original hypothesis is no. The reason is that the midcap segment tends to trend more than the large-cap segment.

S&P Midcap Trading Strategy no 1

We start by backtesting our ATR-strategy that we published to our subscribers to our monthly trading edges in August 2001. We label this strategy as a volatility strategy.

If we backtest the same trading strategy on IJH we get the following equity curve:

You don’t need to look at the strategy performance metrics to conclude that this is a poor strategy.

For comparison, this is how it looks at QQQ (Nasdaq 100):

The trading edge was originally made for QQQ and it’s easy to understand why. As we initially said at the beginning of this heading, you can’t expect to find trading strategies that work on all kinds of assets, not even within different sectors of the stock market. The reason is that stocks have different business models, different ownership, and are exposed to different outside factors.

S&P Midcap Trading Strategy no 2

Let’s move on to backtest midcap strategy number 2. This time we try an overnight trading strategy: the monthly trading edge of March 2022. We enter at the close and we sell the close 24 hours later (the next trading day).

There are 362 trades, the average gain per trade is 0.31%, CAGR is 5% despite being invested only 6% of the time, the win rate is 60%, and the profit factor is 1.63. The numbers are decent, but again, the strategy works better on SPY and QQQ than S&P midcap (IJH).

S&P Midcap Trading Strategy- ending remarks

We have been trading and backtesting for over 20 years, and we can safely say it’s more difficult to find good and uncorrelated trading strategies in the midcap sector than in the “overall” market (S&P 500 and Nasdaq 100). Thus, we have yet to have a tradeable S&P midcap trading strategy that offers good risk-adjusted return and at the same time is uncorrelated to our other strategies.