You Thought the Rotations Were Over?

Hey trader,

Last week handed us a mixed tape. Sector rotation kicked into a higher gear.

For the first time in six weeks, the Nasdaq didn’t outperform. The S&P 500 took over leadership instead.

The Dow came in right behind it.

The market breadth crowd went awfully quiet. I suspect that’s because breadth showed a notable improvement.

Breadth measures how many stocks are participating in a move. Better breadth means more names are pulling their weight beyond the handful of mega-caps that usually carry the index.

That sounds bullish on the surface. The sectors doing the lifting tell a more complicated story.

The top-heaviness of this market still gets overlooked. Tracking sector rotation is one of the best ways I know to measure risk appetite.

Last week’s sector rotation brought back a leader that hasn’t shown up in months. It carries a warning I don’t ignore.

Tech’s earnings this week will decide whether bulls can shake that warning off. Here’s how the leaderboard shook out.

Sector Rotation Picks Up Speed

The top-performing sector last week was utilities. It’s been months since we’ve seen any Utilities (XLU) topped the leaderboard last week. It’s been months since we’ve seen any leadership from that sector.

Utilities leading is a classic risk-off signal. Investors tend to reach for them when they want shelter.

That doesn’t mean the market has topped out. It means the conditions that tend to precede a high have started to form.

Consumer staples were strong too. I want to put that in context.

A sector rotation back into downtrodden names means those beaten-up sectors catch a bid. Improving breadth can literally mean risk-off sectors are outperforming.

The breadth crowd likes to treat participation as a pure health check. I care just as much about which stocks are doing the participating.

Here’s how I read last week’s sector rotation:

• Utilities leading on a 1-week basis shows investors reaching for shelter for the first time in months.
• Consumer staples catching a bid confirms the defensive tilt.
• Better breadth may reflect defensive buying more than fresh risk appetite.
• Tech still holds the 30-day lead, so bulls haven’t lost control of the bigger picture.

Put those together and the market looks like it’s hedging its bets. Bulls and bears are duking it out sector by sector.

The AI Trade Has a Power Problem

There’s a silver lining with utilities. The AI trade still has tremendous power demands.

Every new data center needs electricity to run. Some of the utilities strength in this sector rotation could tie back to that demand.

I won’t dismiss that explanation. It’s a real tailwind for the sector.

History has still shown that utilities outperforming signals a top can form in the coming weeks. I respect that pattern even when there’s a bullish story sitting right next to it.

A top forming isn’t the end of the bull market. Pullbacks are normal and healthy inside long-term uptrends.

They also tend to hand patient traders better entries. I’d rather see a reset I can buy than chase a market that’s running on defensive fumes.

Tech Has to Win This Sector Rotation

Energy (XLE) also overtook technology as the top-performing sector on a 1-year basis. It already held the lead year-to-date.

That’s a long-term sector rotation tech bulls can’t ignore. They have their work cut out for them this week.

Earnings season is here. The most economic growth is still coming from tech.

Tech is allowed to pause occasionally to catch its breath. Every leader needs a rest after a big run.

The market can’t afford tech taking itself out of the game, though. Too much of the index’s weight sits in those names for anything else to pick up the slack.

Utilities and staples can lift breadth for a week or two. A defensive sector rotation can’t drive the S&P 500 to new highs on its own.

Here’s what I’m watching this week. Strong tech earnings and XLK reclaiming the 1-week lead would make last week’s sector rotation look like a breather.

Utilities and staples holding the top spots while tech stalls would tell a different story. That’s when it makes sense to play more defense and get ready to buy the pullback.

I’ll be watching which setups the Trinity Terminal picks up as this sector rotation plays out. The leaderboard will tell us who’s really winning this fight.

Keep your eyes on tech’s earnings this week. They’ll tell you whether this rotation is a pause or the first crack.

Talk soon,
Gianni Di Poce