For a long time, the story was simple.
A handful of mega-cap stocks were doing all the work, dragging the market higher while everything else lagged behind.
That story hasn’t really changed in people’s minds. But the market itself has moved on.
Today, participation is broad. Most stocks are going up.
The parts of the market that are struggling are the very same names that used to “carry all the weight.”
That kind of shift matters.
Rotation like this can be a sign of a healthy bull market broadening out. It can also be the early stages of something far more disruptive.
The difference is not academic. It determines how you position, what you own, and what you avoid.
So the real questions are these. How do we tell the difference? How do we protect ourselves if this continues?
And, more importantly, how do we profit from it while it’s happening?
Below, we’ll walk through the evidence.
First, the rotation out of mega-cap growth. Then the bigger, more structural shifts happening beneath the surface.
And, finally, what this means for positioning in a bull market that looks very different from the one most investors are still talking about.
Rotation Out of Mega-Cap Growth
This chart has been making the rounds this week:
The bigger trend has already rolled over, and it’s pulling the so-called “Magnificent Seven” down with it.
These stocks are now trading at their weakest levels relative to the S&P 500 since early September.
That weakness is not happening in isolation.
At the same time, the Nasdaq 100 is hitting new nine-month lows relative to the small-cap Russell 2000.
When mega-cap growth underperforms both the broad market and small-caps simultaneously, that’s not noise.
That’s rotation.
And this isn’t hindsight bias, like we discussed in last week’s session of The Lab Training LIVE on human behavior.
This shift was developing in real time, with clear relative-strength signals well before it showed up in the headlines.
Yet most investors are still staring at the wrong charts.
They’re looking at the index level and missing what’s actually changing beneath the surface.
The Bigger Rotation Going On
While we’re focusing on small caps outpacing the mega-cap stocks that have struggled to make any progress, there’s another key driver to this that we don’t want to ignore.
Look at the iShares Russell 1000 Growth ETF (IWF) hitting new six-month lows this week relative to value.
This is happening at the same time that the S&P 500 is also hitting new six-month lows relative to stocks around the rest of the world:
This isn’t just a mega-cap growth-Mag Seven story. This has been a massive rotation into other types of stocks.
You can see the indexes with a lot more industrials, financials and natural resources massively outperforming the indexes loaded with mega-cap US growth.
You see it in the Russell 2000 small caps, U.S. value stocks and international equities in general.
Is this bad for investors in the stock market?
Can the major U.S. indexes hold up without their biggest players participating?
At what point does the selling in these mega caps spill into other parts of the market?
Investors are loaded up on these things. The faces of all those AI CEOs were plastered all over the magazine covers last quarter.
How Do We Profit?
I think we want to do more of what’s working and less or none of what’s not.
If that means owning energy and consumer staples, then so be it. If that means having a lot more intentional exposure then great.
If we need to spend more time looking for less correlated small-cap stocks that are shining despite any volatility, then fine. We’ll do that.
It’s a bull market. I think we want to keep an open mind about possible rotation back into these mega-cap stocks, magnificent or otherwise.
But I gotta see it.
The futures positioning last summer was at historic extremes. The speculators got caught way too short small caps and way too long the Nasdaq 100.
These unwinds can be incredibly violent. They don’t typically end as quietly as they’ve been.
Expect some fireworks!
Stay sharp,
JC Parets, CMT
Founder, TrendLabs