Large-caps have been outperforming their small and mid-cap peers for some time now. But with the US dollar ($DXY) pressing on the upper end of its multi-year range and investors fretting over multi-national company exposure to trade-related risks, many are calling for more domestically focused small/mid-sized stocks to start showing some strength relative to the broader market.

The story seems to support a case for mean reversion, especially following such a prolonged period of underperformance. So, what are the charts telling us?

This 10-year ratio chart of the S&P Mid-Cap 400 ($MDY) relative to the S&P 500 ($SPY) shows prices resolving lower from a near decade-long topping pattern. It looks like the mean reversion move investors are looking for already came and went as mid-caps outperformed for a few months off Q4’s low before failing at the downward sloping 40-week moving-average.

The ratio broke below key long-term support ~1.23 at the end of last year and made its lowest low in 9-years at 1.21. Since December, price has tested these new lows three times and just this week broke below them to close at their lowest level since February of 2010. Prices also retested key former support turned resistance at the 2012 and 2016 lows before rolling over in April. Notice that the positive momentum divergence dating back to Q4 of last year was never confirmed by price.

This looks like the beginning of a new structural downtrend, and if we remain below 1.23 there’s little reason to expect mid-caps to outperform anytime soon.

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