Sector Rotation is the lifeblood of a bull market. New leadership groups emerge as healthy markets persist.
And, right now, we’re seeing it play out in real time.
Take Biotechnology. For the past four years, this group has been dead money, lagging behind almost everything else.
Zoom out further, and you could even argue Biotech has been stuck in the penalty box for a decade.
That kind of underperformance doesn’t stay hidden. Word gets around.
Today, short interest in the equally weighted Biotech ETF (XBI) is higher than it’s ever been.
Yet, while the crowd leans bearish, XBI just closed the week at fresh year-to-date highs:
If you own a stock, you’re just promising to be a future seller one day. But if you’re short a stock, you’re a guaranteed future buyer.
There have never been this many guaranteed future buyers in Biotech.
Small-Cap Season
There are more than 200 Biotechnology stocks in the Russell 2000, making it one of the small-cap benchmark’s largest holdings.
Taking a look at this chart here below, are you going to make the bet that this is going to be a massive top, in a risk-on sector like Biotech, in the middle of a raging bull market?
Of all the bets you can make, is that really the one you want to put on?
If you want to bet this is the historic top for Biotech – right in the middle of a raging bull market – you’ll have plenty of company.
Short interest has never been higher.
We’re leaning the other way. Their pessimism is our fuel.
We’ve already got several Biotech names working inside the The Divergence portfolio, and we added another this week.
Odds are, we’ll add more.
Because when everybody’s wrong – and, in my experience, they usually are – is exactly when the biggest opportunities are born.
This Week in Everybody’s Wrong
On Monday, we made the simple point that while many investors waste their time trying to be smarter than the market, we focus on money flow.
Price is the only thing that pays, and trends persist.
It’s dangerous to fight these basic facts.
On Tuesday, we talked about what’s driving this bull market and what might be a sign of trend change.
I’m watching the offensive groups, particularly the Consumer Discretionary stocks.
And that group just closed at a new all-time high for the first time in 2025.
On Wednesday, I explained why I’m not interested in a 4% return.
We’re looking for 300% returns.
On Thursday, we discussed the end of a historic period of American exceptionalism in the stock market.
The rest of the world finally realized how dominant the U.S. stock market has been.
So we’re flipping that around and letting them have it.
On Friday, we updated the rules.
Small-caps, mid-caps, large-caps – the way we’ve classified companies for decades no longer fits the reality of today’s market.
As traders and investors, we either adapt to reality or we fail.
On Saturday, Sam Gatlin took us from Toronto to Dubai by way of Athens.
Have you ever seen the old Athens Stock Exchange?
Here’s Sam with a broad and expansive look inside this bull market.
We’ll see you Monday morning…
Stay sharp,
JC Parets, CMT
Founder, TrendLabs