Let's talk small caps. And banks.
We'll start with the small caps, because it has been my view that they can play catch up to the mega caps. Or, at least they can be the ones to close the wide gap that is in place. If we look at the chart of small-cap stock's Russell 2000 (IWM) relative to S&P 500 fund (SPY) we need to squint very hard to see that this ratio is at a three week high and is now up on the month of May.
It is still tenuous and unless it can do more than inch ahead, the gap will take a very long time to narrow. But I think it can narrow.
If we look at the banks relative to the S&P, it's a different picture, because the ratio still has quite a way to go for it to even get back to where it was in early May. Yet the outperformance in the last week has been a good first step.
Now let's talk about the Bank Index itself. It ran smack into resistance during Wednesday's rally. This is a difficult spot now, because to change the pattern, it must get over that line and it has not been able to string together more than a day or two on the upside. I am hopeful it can do it, but I am also cognizant that we have had plenty of one-day wonders.
The IWM crossed over the downtrend line that has been in place since February, which I consider a positive. There is still plenty of resistance overhead, all the way up to $180, but since I think small caps are going to be the ones to bridge the gap, I suspect they make their way toward resistance.
How was breadth? Honestly it was good, but not great. For example Tuesday's decline of 26 points on the S&P saw net breadth at -1,780 on the New York Stock Exchange. Wednesday's rally where the S&P was up nearly 49 points saw net breadth at +1,640. So net-net breadth is down over these two days (by about 140 issues) while the S&P is up over 20 points.
And it wasn't enough to turn the McClellan Summation Index. Not yet. That would require another day of positive breadth.
As long as I am complaining, I may as well point out that the number of stocks making new highs is still under 100. In fact, it's a mere 56, which is not great. Keep in mind we had 200 new highs in early February. But since I think this is more about the down and outs catching up they shouldn't be expanding right now.
The best part of the day was that no one was pounding the table and crowing that they were bearish but long only tech stocks.
The big fly in the ointment remains the VIX. The Daily Sentiment Indicator (DSI) for the VIX is now at 12. I would be careful about getting too comfortable in the market even if small caps and the banks had a great day.