Sector rotation is always happening. That’s the market doing its job.
Sometimes it shows up during healthy uptrends. Sometimes it shows up near major tops. The difference is in the direction of that rotation.
This is what we track every day at TrendLabs. Not headlines, and not opinions, but actual money moving underneath the surface.
And right now, something doesn’t add up.
Sentiment continues to get more and more bearish. The American Association of Individual Investors (AAII) has shown more bears than bulls for five straight weeks.
Magazine covers are screaming about economic trouble and geopolitical chaos. Options activity is leaning hard to the downside.
Everybody seems positioned for a breakdown.
So if stocks are really about to roll over, the rotation should confirm it.
But it’s not.
The most defensive areas of the market are getting hit. At the same time, the more aggressive, higher-beta stocks are starting to outperform again.
That’s not what weakness looks like.
That’s the opposite.
If you’re paying attention, it raises a much more important question heading into this next move.
Is This Really “Defensive”?
Some sectors get labeled “defensive,” such as health care and utilities. That’s fine.
But when managers actually need to play defense, there’s one place they go: consumer staples.
These are the must-haves, things like toilet paper, cigarettes, soda, beer, and toothpaste. No matter what the economy is doing, demand for that stuff is there.
When markets are in trouble, money rotates into staples. That’s where they hide.
Except they’re not hiding there now.
Staples just broke down yesterday to new six-week lows vs the S&P 500. Former support from last year has turned into resistance:
That’s not what you see in a weak market. That’s what you see when money is leaving the safety trade.
And it doesn’t stop there.
Look at High Beta (SPHB) vs Low Volatility (SPLV).
If stocks were about to roll over, SPLV should be leading. That’s where investors go when they’re trying to protect capital.
Instead, High Beta is pushing up toward new one-month highs relative to Low Volatility:
That’s evidence of risk appetite, not risk aversion.
While the headlines are screaming “Caution!”, the rotation seems to be telling a different story.
When the leaders and laggards don’t line up with the narrative, it’s usually the narrative that’s wrong.
This Is What Bull Markets Look Like
Sector rotation is the lifeblood of any bull market. That’s not a theory. That’s how this game works.
When things start to break, you see money move into defense. Staples lead. Low Volatility takes over. Managers get conservative.
That’s the warning sign.
But that’s not what we’re seeing.
The areas that are supposed to benefit from fear aren’t catching a bid. They’re getting sold.
At the same time, the more aggressive groups are attracting money. High Beta is leading. Risk is being embraced, not avoided.
That’s not deterioration. That’s participation. And the craziest part is no one seems to care.
Everyone is too busy focusing on the narrative to notice what price is actually doing.
We’ll let the market decide how this plays out. But if this is what “bearish” is supposed to look like…
Yeah… Everybody’s Wrong.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs