Rotation is the heartbeat of every bull market. Not just some of them – all of them.
Yesterday, we talked about Consumer Discretionary and how it went from laggard in the first half to leader in the third quarter.
But that’s just one rotation in play – the story goes much deeper.
Broadening Market Strength
I pay close attention to both what people say and what they actually do.
As technicians, our job isn’t just to analyze the market – it’s to study the human behavior driving those price moves.
Every tick on the screen is a reflection of fear, greed, positioning, and psychology.
And here’s what I’ve noticed: The loudest voices calling for a market top, insisting this rally is “unsustainable,” aren’t the ones doing the work.
They’re rooting for a decline, often for reasons that have nothing to do with the data.
Maybe it’s politics – they don’t like President Trump, and they want the narrative to match their bias.
Maybe it’s envy – they missed the run, and they need the market to fall so they don’t feel left out.
But the truth is, they’re ignoring the rotation happening beneath the surface.
Strength is broadening out across sectors, and you can see it clearly in the S&P 500 Equal-Weight Index:
SP500EW continues to look strong and poised for a breakout to new all-time highs.
It’s built differently than the traditional S&P 500 most people follow. Here, every stock gets an equal vote in the outcome, no matter how big or small it is.
By contrast, the traditional S&P 500 gives outsized influence to the giants – Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN) – while the smaller names barely move the needle.
Market-Cap vs Equal-Weight
Comparing these two indexes isn’t about measuring market breadth.
This is a sector rotation story.
Consider the weightings.
Technology makes up about 35% of the market-cap weighted S&P 500. In the equal-weight version, Tech shrinks to just 16%, less than half the influence.
Industrials tell the opposite story. In the market-cap index, they’re a modest 7%. In the equal-weight S&P 500, it’s 14% – double the exposure.
The equal-weight index also tilts heavier toward Materials, Energy, Real Estate, and Utilities.
The real tug-of-war comes down to Tech stocks vs the others. When Tech is leading, the market-cap-weighted S&P 500 shines.
When leadership rotates, when other sectors step up, the equal-weight S&P 500 takes the crown.
Here’s what the ratio between the equal-weight index and the market-cap-weighted version looks like over time:
When the blue line rises, the equal-weight S&P 500 is in charge. When it falls, the market-cap version takes the lead. And right now, this ratio has dropped to new multi-decade lows.
If it can reclaim the 1.2 level and get back above every former low since 2008, that would signal a meaningful rotation away from Tech leadership and into the rest of the market.
That’s the level we’re watching.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs