Small-Cap Whispers, Mid-Cap Wonders

Now that was an interesting day in the markets.

Stocks staged a rally and then were quashed by the news out of the U.K. It is possible that the remainder of the week sees the market break, but mostly it felt more like we bent on Tuesday. It feels as if a week ago that news out of the U.K. would have taken the S&P down at least another 2%-3%.

Did you notice that the small caps were green? OK, they were barely green, but green they were. But here's the really interesting part: Small caps haven't made a lower low (than June) on this recent trip down. Some are starting to notice. There are whispers -- perhaps no one trusts them? Or, perhaps, they don't want to jinx them?

But I would like to point out that the mid caps are actually a few percentage points higher than the June low, and higher than the late September low. Sure, that can change in a flash, but since Friday's gap down, they have held steady.

What's more is if you look at the small caps, as in the Russell 2000 fund  (IWM) , relative to the mid-cap stock fund (MDY)  an interesting picture emerges. When the ratio is heading down, IWM is underperforming. You can see the peak in November and the low in May. The summer rally saw the small caps beat the mid caps. But since August, the mid caps are doing better.

The flip side is that the semiconductors are terrible. They are down nearly 50% from the highs. The only solace I can offer here is that at least folks are finally selling them and talking about selling them and how awful they have been. When I noted how terrible they were in the spring, I was berated for hating the semis. So there's that.

The banks are also terrible. Where they had held up well this summer, they have collapsed in the last few weeks. Here the only good news is that they are down so much heading into earnings later this week that the news would have to be truly terrible for them to collapse much more.

I am still eyeing the bonds, though. With the producer price index out on Wednesday morning followed by the consumer price index on Thursday, I remain interested that the Two Year Note has not made a new low in just over two weeks now. One of those economic indicators might do it, but given the chance -- even with last week's jobs number -- it hasn't. That ought to be a positive if it can stay that way.

Tony Dwyer, strategist at Cannacord Genuity, notes that stocks have never bottomed before the Two Year has. And that the shortest time frame between a low in the Two Year and a low in stocks has been two weeks (the average is usually measured in months though, not weeks). That's why this Two Year is worth watching.

And besides, my mother called (at that low just over two weeks ago) wanting to buy Treasuries. I don't have a problem with her doing so, but I took it as a sign that she hadn't asked about buying them before. I took it to mean, the guy on the radio probably suggested it! That usually means the move is just about over.