For three months now the small caps, and therefore breadth in the market, have outperformed Apple (AAPL) . Many think the market is terrific when Apple leads but as I have expressed to you before, I think Apple tends to live in a world of its own, although admittedly I thought that was the case before it fell 40%.
Why does this matter? Perhaps we should say why might it matter? Because when small caps do well breadth tends to do well and when breadth does well the market does well. For the last year each time the ratio of IWM to AAPL has reached this level we have seen Apple kick into high gear and as it has kicked into high gear, small caps have taken a back seat. I admit it didn't get truly awful for small caps until they cracked under the range they had been in last spring in late July but they matter.
I believe this matters because when there is only so much money in the market we have to worry that folks will chase Apple and if they do that breadth, which has been terrific, could falter. And if breadth falters the majority of the indicators I follow will eventually roll over as well.
For example, the McClellan Summation Index has been straight up, this despite the nearly two weeks of sideways we've had in the major indexes. The last two days have seen breadth outperform the S&P by a wide margin. For example, Monday's decline of 20 points on the S&P saw breadth at -330 issues which is minimal. Tuesday's decline of 3 points in the S&P saw net breadth at +375 issues. That's out performance.
It will now require a net differential of -2,600 advancers minus decliners on the NYSE to halt the rise in the Summation Index. That's still a lot of cushion but as you can see, if breadth weakens the number it will take to halt the rise will come down, paring back that cushion. This is why breadth matters.
We do not want to see big cap technology stocks get all the money because that generally does not help breadth.
My biggest surprise of the day came on the sentiment front. I cannot believe the Investors Intelligence Bulls barely budged. They are just shy of 46%, not even notching up a point in the last week!
Let's end with a word on bonds. I had thought the yield on the 10 Year Note would get to 2.80% before it headed back down, but it fell short by a few ticks. It is now heading back down. I am keeping my eyes peeled on this action because a move back down could be a retest to form a W pattern, especially since the Daily Sentiment Index (DSI) is now at 72. A reading over 80 and I'd have to look for yields to move up not down.
