Divergences in this market are a touchy item. There are those who think they matter, and those who think they don't.
I suspect those who think that divergences matter trade individual stocks and have not centered their portfolios around the mega-cap tech or other growth names in the last month. Those who think they don't matter, however, are mostly either mega-cap tech holders or large-cap index players.
Or maybe everyone forgot the 10% correction Nasdaq had in February or the one it took again in early May. Or maybe they don't realize the Russell 2000 has yet to take out the March high. Whatever it is, it feels as though folks are taking sides and willing to fight over it.
Back in the late 1990s, we had so many divergences it was hard to keep up. Do you know when they began? They began in mid-1998. Yes, just take a look at the cumulative advance/decline line from that time. And how much did the S&P 500 rally in that time? 50%. Yes, 50%.
Cumulative breadth is not meant to be a timing tool. It is meant to tell you what is transpiring under the surface. It is meant to tell you how healthy the market is. Just because you are diagnosed with a disease today, does not mean you will die tomorrow. And sometimes they discover new drugs to heal you.
Thus far, the breadth has only diverged with the S&P for the last month and Friday it had its best day in two months. It still has not made a higher high, but at least it had a good day.
For the last year, the market has been about group rotation. I call it the either/or market. If mega-cap tech rallies, it usually does so at the expense of everything else. And when everything else rallies, mega-cap tech usually sits it out. That's the market we have. It might not be the one we want, but it's the one we have.
If you want it to change, then something will have to change in the pattern, and that has not yet happened. To change the pattern of either/or, I think we would have to see the Russell 2000 fund (IWM) break that lower line. That line is solid. It has been solid all year with now six touches.
Remember the rule when it comes to lines: Two points make a line, and a third confirms it. So with six points touching that line, I consider it a big deal if it breaks.
I think the small caps are into oversold territory. That means if we see a pullback (after Friday's big up day, it would not be unusual) early in the week I would expect them to rally later in the week.
The issue is sentiment. It remains far too complacent for the most part, especially in big-cap tech. The Daily Sentiment Index for the S&P is back at 84 and Nasdaq is back at 85. A few up days and they will be back where they were a week ago. A proper correction, like the small caps had would reset this.