[pcabc]

On your questions.
1) Weighting is the key here. Indexes might be averages of the stocks in them but they are not equal weighted, so like you said can be moved by their largest components and distort the actual position of the market. This is why I like the breadth indicators so much like the point and figure double top breakouts and double bottom breakdowns, advance decline, and Percentage of Stocks above their Moving Averages etc. As they all show an unbiased view of the market strength, and so can be used to assess risk, and hence when to be more aggressive or more cautious with your portfolio.

I can see what you are saying, however, looking at the data I have seen some thinly traded or very small value stocks move very wildly whereas the larger ones don't.  Care would be needed that these very small thinly traded stocks do not mess up the outcome perhaps?  On the other hand, if they are numerous and fairly random perhaps they cancel, and if a large number move in unison then that is good data?

Not a useful conclusion, just a thought.