Sector rotation messes with people’s heads. They see leadership change hands and immediately assume the market’s rolling over.
Relax. Just because the stocks that led the last few months aren’t leading today doesn’t mean breadth is breaking down. It probably just means you’re having trouble keeping up.
Remember those quantum stocks everyone loved in August and September? They’re not leading anymore. That’s not weakness. That’s rotation. Big difference.
Now, if there weren’t any leaders — if the leaderboard were empty — that would be deterioration. But that’s not the case. There are plenty of leaders out there.
Most investors are just too lazy to go find them.
Skate to Where They’re Going
Sector rotation is the lifeblood of a bull market. You’ve heard me say it a million times — and for good reason. It’s not just a saying. It’s how the market actually works.
I like to think of it the same way hockey legend Wayne Gretzky did: “Skate to where the puck is going.” In our world, that means figuring out which sector money is about to rotate into next — so we can already be there when it happens.
First, we start with the big question: Does this bull market still have legs? Is there enough evidence to suggest the path of least resistance for equities is higher?
If the answer is “yes,” then our job is simple: Look for the major sectors that haven’t been participating as much and see if money is starting to flow their way.
Three months ago, that sector was Healthcare. It’s one of the top weightings in both the Dow Jones Industrial Average and the S&P 500 — and we’ve been all over it.
Now people are talking about the rotation into Healthcare, but it’s already been happening for months.
Here’s what it looks like today from a bigger-picture view:
- a long-term uptrend;
- a healthy consolidation within that trend;
- a failed breakdown to new lows — trapping the shorts and shaking out the weak longs;
- and, now, the breakout.
Some might call that shakeout (the green circle) a “whipsaw.” Others call it a “bear trap.” I prefer the term “bull hook” — because at the end of the day, that’s exactly what it is: a bullish pattern.
No matter what you call it, it’s just sector rotation. We’re in a bull market, Healthcare was a laggard, and now it’s a leader.
Classic bull market behavior.
So where’s the puck heading next?
That’s the real question — and that’s where the next big opportunity lies.
Where To Skate Next?
Late last month, we started buying Energy stocks — but only the strongest ones. The outliers showing real, unprecedented relative strength.
Then last week, we added a few more.
And again this week — building on our Oil & Gas exposure.
Why? For the same two reasons we were buying Healthcare a few months back:
- Because this is still a bull market.
- And in bull markets, everybody gets a turn.
It’s not just seven stocks driving this thing — it never was.
This is a massive global market filled with thousands of stocks trading right here on U.S. exchanges. Leadership rotates. That’s how bull markets breathe.
Energy, for its part, hasn’t participated much at all. The Energy Select Sector SPDR Fund (XLE) is still sitting near the same levels it was back in the summer of 2008:
And I remember that summer well. In 2008, breadth had been deteriorating — badly. Nothing was working except Energy and a handful of Agriculture names. Everything else had already rolled over.
Today’s market couldn’t be more different. Breadth is strong, leadership is rotating, and participation all over the world keeps expanding.
I know the headlines want to scare you with “crash coming” stories. But I’m not seeing any evidence to support that, yet. None.
In fact, from where I’m sitting, 2025 looks like the exact opposite of 2008.
But I cheated, I actually took the time to count.
A Simple Tell
I’ll leave you with a little trick I like to use to gauge whether there’s real risk appetite out there for equities — or if all this “deterioration” talk actually has any merit.
The answer usually lies in European Banks.
Here’s the way I see it: If the market were truly on the verge of collapse, if breadth were really breaking down the way some claim, then European Banks wouldn’t be breaking out to new highs.
When markets are under genuine pressure — I mean real stress — European Banks tend to be right in the middle of the mess, getting hit along with everything else. They’re about as far from a safe haven as it gets.
In the chart below, you can see a picture-in-picture view of the European Financials ETF (EUFN) — the larger trend pressing up against new all-time highs, and a closer look at the current consolidation:
If you’re convinced market breadth is weakening, then you’re probably watching this index for a breakdown. That would confirm your bearish view.
But if you’ve actually taken the time to count — and you recognize that in bull markets leadership rotates — then you’re likely watching for continued strength and leadership out of European Financials.
Either way, there’s something here for everyone.
And in case you’re new around here, I’ll repeat something I say often: I don’t care which way it goes.
Not in a cynical way — just in a practical one.
I’m 43. I have three kids, a family, and a life outside of these screens. I care deeply about those things. But when it comes to the market, I don’t have the time or energy to pretend to care about what it “should” do.
When I was younger, sure — I worried about the economic implications of every market move. These days, I focus on what matters: the evidence, the trends, and what’s in our portfolio.
If it’s a great bullish market, we’ll be long the right stocks.
If it’s a rough one, we’ll be positioned for that too — maybe even through inverse ETFs.
Either way, the process doesn’t change. We weigh the evidence and act accordingly.
At the end of the day, that’s what grown-ups in this business do.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs