We’ve been in a raging bull market for stocks, and suddenly this week everyone’s telling me we’re finally getting “confirmation” of it.
That’s interesting, because just two or three months ago the narrative could not have been more different.
Back then, I was hearing nonstop about weak market breadth, narrow leadership, and how everything was supposedly on the verge of falling apart.
Now the tone has completely flipped.
Whenever that happens, I start to get a little more careful.
So I go back to basics. I ask what a healthy, confirmed bull market should actually look like beneath the surface.
Just as important, I ask what kinds of characteristics tend to show up before markets run into trouble.
There’s also a timing element worth keeping in mind.
We’re about 80% of the way through the strongest three-month stretch of the year, from November through January.
Historically, the first meaningful bump in the road often shows up as we move closer to February.
That window is approaching.
Which makes this a good time to look closely at what’s confirming the bull market and what might be quietly starting to diverge.
The First Divergence
Major corrections always start somewhere. There has to be a first crack before you can start to see a lot of them.
Yesterday we walked through the strength in Consumer Discretionary stocks and the fact that participation within the group has been broadening.
None of that is bearish.
The issue is what’s happening at the same time.
Consumer Staples, the most defensive area of the market, have been performing extremely well despite all of this broad strength. That matters.
When market tides begin to shift, Consumer Staples tend to outperform, particularly relative to Consumer Discretionary.
Now let’s look at what we’re seeing.
The S&P 500 is pushing to new all time highs, yet the ratio of Consumer Discretionary to Consumer Staples is making lower highs:
That’s a divergence.
And these are exactly the kinds of divergences that tend to show up near important turning points.
Does this mean the stock market has to crash from here? Does it mean you should run for the hills?
Not necessarily. We don’t know yet.
But it is a crack we haven’t seen at any point during this historic advance from last spring’s lows.
And that alone makes it worth paying attention to.
The Magnificent Seven Underachieving
Your best players are supposed to carry the team. There’s nothing wrong with that.
If Michael Jordan were only averaging eight points a game, the Chicago Bulls wouldn’t have won six championships. Leadership matters.
That’s why last year’s complaints about a handful of stocks driving the S&P 500 never bothered us.
Strong markets are supposed to have leaders, and winning tends to concentrate. It wasn’t weakening breadth; it was just sour grapes.
But notice what’s changed.
No one is complaining about that anymore. The narrative has quietly shifted.
Now let’s look at the data.
The Magnificent Seven, which represent more than $20 trillion in market capitalization, are hitting new four-month lows relative to the S&P 500 and have broken below their 2024 relative peak:
That’s not what leadership looks like.
Is it bullish when the largest and most influential stocks in the market start breaking down relative to everything else?
I don’t think so.
The real question isn’t whether this is immediately bearish. It’s how much it matters, and whether it’s another early crack forming beneath the surface.
Am I getting cute by looking for less bullish evidence?
Or are these developments – showing up at the same time optimism is returning – worth taking seriously?
I don’t know what the market will do next.
But I do know this: When leaders stop leading, it’s never something to ignore.
And, right now, that’s exactly what’s starting to happen.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs