We just entered one of the most difficult months of the year for stocks.
The strongest three-month stretch on the calendar, November through January, is officially behind us.
Historically, what follows is not a victory lap. It’s the hangover.
As we move into this window, leadership matters. Energy tends to do well this time of year. But so far in 2026 another group has quietly stepped into the spotlight: consumer staples.
In January, the S&P 500 Consumer Staples ETF (XLP) gained roughly 7.5%. It outperformed the Consumer Discretionary ETF (XLY) by more than 600 basis points.
That kind of dispersion doesn’t happen by accident.
It’s exactly the type of rotation you’d expect to see as markets move into one of the roughest periods of the year.
And that brings us to the real question: What is this rotation actually telling us about risk right now?
The Moment of Truth for Risk Assets
Despite a long list of new highs across U.S. stocks, sectors, and indexes on a monthly closing basis, the action beneath the surface tells a different story.
The rotation we’re seeing is far more consistent with a risk-off environment than a healthy, expanding bull market.
The clearest signal comes from the ratio of XLY to XLP.
When this ratio is rising, investors are embracing risk and economic growth. That’s what strength looks like. When it’s falling, capital is moving toward safety. That’s what caution looks like.
Right now, that line is rolling over:
Does that mean the stock market has to crash? No.
But do most major market drawdowns tend to occur while this ratio is falling? Absolutely.
The potential top that’s been forming since September becomes hard to ignore in this context. In addition to outperforming the broader market, staples have also been beating financials.
That’s not what leadership looks like in a strong risk-on environment.
This isn’t a new development, either. We flagged the rollover in discretionary vs staples in mid-January. Since then, the deterioration has only accelerated.
At the same time, the dominance of U.S. equities quietly peaked last year. Across the globe, plenty of markets and sectors are acting far better than U.S. growth stocks.
My suspicion is that this shift is not temporary. It’s a theme that continues to play out as we move through 2026.
The market is not whispering anymore. It’s telling you exactly where risk is, and where it is not.
Right now, everybody’s wrong about what leadership actually looks like.
This Week in Everybody’s Wrong
On Monday, we talked about what happens when a bullish pattern stops being bullish.
We usually see two types of patterns, continuation patterns and reversal patterns.
The bottom line is bull markets end when continuation patterns fail.
On Tuesday, we went hunting for cracks beneath the surface.
We’re always looking for anything that could signal a bigger problem before it becomes obvious to everyone else.
Here’s why we’re watching these two lines right now.
On Wednesday, we discussed conversations about market breadth and the S&P 500.
It happens every cycle: A narrative sounds reasonable, and it gets repeated, again and again, until it’s accepted as fact.
People love shortcuts, even if it’s easy enough to just do the work…
On Thursday, we repeated something you’ve heard me say a million times.
You’re going to keep hearing it, because it never stops being true.
Sector rotation is the lifeblood of a bull market.
We talk a lot about Fibonacci and the Golden Ratio.
But we don’t often discuss ultra-specific levels for the S&P 500.
On Friday, we did exactly that.
On Saturday, Grant Hawkridge shared about the value of preparation.
Grant’s getting ready for a golf tournament, because it’s summer in the Southern Hemisphere right now.
Have a great Sunday.
We’ll see you Monday morning…
Stay sharp,
JC Parets, CMT
Founder, TrendLabs