As we move into the back half of March, it’s a good time to start thinking about what the spring might look like for stocks. Not just in terms of direction, but in terms of rotation and volatility.
We’ve already seen a few things that tend to show up during periods of transition.
Volatility has started to spike. Investors just pulled money out of U.S. equity funds for the first time since last April, which happened to come right before one of the strongest rallies ever.
At the same time, the headlines are turning negative, and demand for portfolio protection has exploded, with put activity surging as investors rush to buy insurance.
That’s usually how it works. By the time everyone decides they need protection, the damage has already been done.
So the question now is simple.
Is this the beginning of something more serious? Or is this just another sentiment reset inside an ongoing bull market?
To answer that, we need to look at three things: the leadership from technology, the extreme pessimism showing up in sentiment data, and one chart that often tells us whether investors are truly getting defensive.
Put those pieces together and the message from the market becomes much clearer.
A Major Top in Technology?
Technology has been one of the pillars of this entire cycle, which is exactly what you tend to see during healthy bull markets.
Go back and study the major bull markets over the past 100 years and a common theme jumps out. Technology is almost always one of the leaders. It’s not just participating. It’s outperforming.
That’s why a major top in technology relative to the S&P 500 would be such a big deal.
If the sector that normally leads bull markets suddenly starts breaking down, that would raise serious questions about how sustainable this advance really is.
Here’s what that relationship looks like:
What makes this situation interesting is what’s happening under the surface.
Software stocks essentially stopped going down last month. Meanwhile, semiconductors continue to outperform the broader market.
In other words, some of the most important groups within technology are still acting like leaders.
Are we really looking at the early stages of a historic breakdown in arguably the most important sector in America?
Or are these just the kinds of normal rotations and resets you tend to see during ongoing bull markets?
To answer that, we need to look at what investors are actually doing. And right now, sentiment is starting to reach some interesting extremes.
Sentiment Near Extremes
There are also several signs suggesting that the end of this bull market may not be anywhere close. What we might be looking at instead is a reset in sentiment.
For starters, individual investors are now more bearish than bullish on equities over the next six months. That’s been the case for four consecutive weeks.
When pessimism starts to stick around like that, it usually tells you investors are getting uncomfortable.
We’re also seeing it from professionals. Earlier this month we pointed out that active investment managers are carrying their lowest long exposure since last spring, right before the market ripped higher.
And now the media is joining the party.
The latest cover of The Economist features a dramatic exploding chart, which is usually the kind of imagery that shows up right when investors are feeling the most uneasy:
The way I learned it, whenever there’s a chart on the cover, we want to buy stocks.
History is full of examples where those kinds of covers showed up right around important lows. In all these cases they marked fantastic buying opportunities:
Even more recently, we saw a similar cleverly designed chart on the cover back in November, which once again turned out to be a great moment to step in and buy stocks.
So now we have another interesting development. Last week marked the first week of net outflows from equity ETFs since April 2025.
Is that the start of a bigger wave of selling?
Or is that exactly the kind of behavior you tend to see right around the time investors get shaken out before the next leg higher?
This chart from our friend Todd Sohn at Strategas shows just how unusual this kind of outflow really is:
It doesn’t happen very often. And when it does, it tends to get my attention.
Does it guarantee the bottom is already in?
Of course not.
But historically, when sentiment reaches these kinds of extremes, it usually means we’re getting pretty close.
And that brings us to one chart that can help settle the debate about whether investors are truly getting defensive.
Consumer Staples Are the Tell
There are several sectors in the U.S. market that investors tend to treat as more defensive. Healthcare, Utilities and even real estate can fall into that category depending on the environment.
But the real defensive sector is consumer staples. Some software and data platforms literally label the group “consumer defensives.”
That’s why this might be the most important chart in America right now:
We’re looking at Consumer Staples relative to the S&P 500.
Notice the pivot lows early last year. That support eventually broke in August, which set the stage for the next leg lower in staples relative to the S&P 500.
In other words, investors were rotating away from defense and toward risk. That helped fuel the rally in stocks through the rest of the year.
Now we’re back at that same level again.
The big question is whether this former support will turn into resistance and send staples rolling over once more.
If that happens, it would suggest investors are once again rotating out of defense and into more aggressive areas of the market.
In that scenario, I’d expect higher stock prices and a chase higher through the Spring.
But if staples break out to new highs relative to the S&P 500, that would likely signal something very different.
That would mean investors are actively moving toward defense, and that usually brings more volatility and downside pressure for stocks.
This is the defensive sector. If the defensive sector is leading, that’s rarely a good sign for the rest of the market.
For now, there’s no damage done.
But if this chart breaks out, that’s when the real trouble begins.
This Week in Everybody’s Wrong
On Monday, we broke down a “six sigma” event in the crude oil market.
A 33% move in a single week doesn’t happen often. Then we saw that kind of move in a single day.
This is something you need to absorb: Changes in asset prices are not random.
On Tuesday, we talked about what the market will do and when it will do it.
The answer can be totally different depending on whether we’re talking hours, days, weeks, months, years, or decades.
Know your timeframe, especially when it comes to the commodity supercycle.
On Wednesday, we did something we like to do around here, which is ask a simple question.
What if this isn’t the end of the bull market at all?
When you dig in a little deeper, it looks like conditions are setting up for the next move higher.
On Thursday, we learned that individual investors are the most bearish they’ve been since November and hedge funds are carrying their largest short exposure since 2022.
After months of choppy action, the market is sitting just a few percentage points below record highs.
On Friday, we revisited a lesson I had to learn the hard way: When you trade the averages, you tend to get average returns.
And average returns are not what we’re after. So we trade stocks.
Some are going up, some are going down, and our job is to know the difference.
On Saturday, Sam Gatlin shared a subtle reminder that March Madness is upon us and a strong message about what we do around here.
Our systems were built through countless hours studying markets, looking at charts, measuring behavior, and stress-testing ideas across different environments.
As Sam says, “Trust the process.”
Have a great Sunday.
We’ll see you Monday morning…
Stay sharp,
JC Parets, CMT
Founder, TrendLabs