I say this because two possible reasons for mid-caps' rise aren't as convincing as they seem.
One is that second-liners are more oriented to the domestic economy than the multinationals that dominate the FTSE 100, and so they should benefit from increased optimism about the UK economy relative to the eurozone and US ones.
The problem with this explanation is that you'd expect small caps, which are also domestically oriented, to also have done well recently. But the 250 has outperformed these too.
A second explanation is that mid-caps have a higher beta than either small caps or the FTSE 100 with respect to the All-Share, and so you'd expect them to outperform if equities generally do well. However, mid-caps have outperformed the FTSE 100 since March, during which time the market generally has moved sideways. Beta can't explain this.
Something else, then, is going on. This something is momentum. The 250 is more like a momentum portfolio than either the 100 or small caps.
Since June 2004 there has been a strong correlation between the 250 relative to the 100 and our momentum portfolio relative to the 100. For levels of the two ratios, the correlation coefficient has been 0.85 (in weekly data), and for volatile monthly changes it has been 0.42. Good times for momentum, then, are good times for mid-caps too, and bad times for one are bad times for the other. Both mid-caps and momentum underperformed the FTSE 100 in May 2005, May 2008, late 2009 and August 2010. And both outperformed in early 2008, the spring of 2009, late 2010 and recently.
To see why this might be, we need the idea of limited attention. Investors cannot follow all stocks at once. This means that some stocks that are off investors' radars can gain from momentum if they post some good news that attracts attention and then more buying.
But what type of shares might benefit most from this? It's unlikely to be big stocks that investors already monitor closely. And it might not be small stocks either, as good news about these can be more easily dismissed (rightly or not) as merely random noise.
This leaves second-liners as the greater beneficiary. They are sufficiently disregarded to benefit from attention turning to them, but sufficiently big that good news about them is regarded as signal more than noise.
Investors in mid-caps, then, are also investors in momentum. Which, on balance, is a good thing.
