Small Caps Lead Market Rally as Sector Rotation Signals Broadening Strength

The stock market continues to display near-term strength, with all major indexes in confirmed uptrends. The , , and are all above their key moving averages, which are trending higher, signaling sustained bullish conditions. Although the Nasdaq 100 has lagged behind the S&P 500, this seems to be due to sector rotation—a normal and positive development typically seen in strong market environments.

One noteworthy development is the Russell 2000’s outperformance, both on an absolute and relative basis. This small-cap index, often seen as a “risk-on” gauge, has broken through key resistance levels and reversed its underperformance trend versus the broader market. This rotation suggests increasing participation across sectors and a broadening of market strength, reinforcing the bullish market thesis.

S&P 500 Analysis

The S&P 500 chart reflects a continued bullish trend. Last month, the index had retraced back to a critical resistance level that turned into support. Since then, it has advanced further, signaling strength. The following points summarize the index’s current status:

• Uptrend Confirmed: The index is firmly in an uptrend, making higher-highs and higher-lows
• Above Key Averages: It remains above its 50-, 100-, and 200-day moving averages, all of which are trending upward. This alignment supports the view of sustained momentum.
• MACD Momentum: The MACD momentum indicator has turned upward and is on a buy signal, indicating renewed strength in momentum after last month’s pause.

This behavior aligns with a healthy price pattern, where pullbacks to support levels result in strong advances. The S&P 500’s leadership in this environment provides confidence in the broader market’s upward trajectory.

Nasdaq 100: Testing Support Amid Sector Rotation

The Nasdaq 100, while still in a bullish price structure, is displaying signs of relative weakness compared to the S&P 500. Last month, the index was just below a major resistance level. Since then, it advanced above that resistance, which has now turned into support, and has retraced back to this level.

From a price perspective, the Nasdaq 100 remains in a confirmed uptrend, sitting at all-time highs and trading above its 50-, 100-, and 200-day moving averages, all of which are trending higher. This aligns with the broader bullish market environment. However, the MACD momentum indicator has turned down and is currently on a sell signal, suggesting some loss of upward momentum.

The Nasdaq 100’s recent underperformance relative to the S&P 500 could raise concerns since it is traditionally viewed as a risk-on index. However, this weakness may not necessarily be bearish. Instead, it seems to reflect sector rotation out of mega-cap technology stocks and into other areas of the market, such as small caps. This kind of rotation is often a healthy sign in a strong market, as it indicates broadening participation and diversification of leadership.

If the index holds support and momentum reverses back to the upside, it could regain strength and align more closely with the broader market’s bullish trend. For now, its performance will be closely watched as an important signal of market sentiment.

 

Small Caps: Leadership Emerging in a Bullish Rotation

The Russell 2000, representing small-cap stocks, is showing impressive strength and could be signaling a bullish broad market trend. Over the past month, the index broke strongly above a significant resistance level, formed by multiple highs dating back to July 2024. This breakout confirms the Russell 2000 is in a clear uptrend. It is also trading above its 50-, 100-, and 200-day moving averages, all of which are trending higher, reinforcing its bullish structure.

The lower panel of the chart highlights a notable shift in relative strength. Since the beginning of 2023, the Russell 2000 underperformed the S&P 500, a trend shown by the downtrending blue line. However, since July of this year, that trend has reversed, with the Russell 2000 now outperforming the S&P 500, as indicated by the upward green arrow. This resurgence in relative strength suggests growing investor confidence in small-cap stocks, often viewed as a risk-on area of the market.

This rotation into small caps is consistent with broader bullish behavior. It reflects capital moving into other segments of the market, diversifying leadership beyond mega-cap technology stocks. Such participation from small caps often signals a healthy market environment, as it suggests optimism about economic growth and future earnings potential across a wider range of companies.

If the Russell 2000 maintains its breakout and relative strength trend, it could continue to be a leader in this bullish market phase, further supporting the case for a strong and broad market rally.

Current Portfolio Allocation

All client accounts are fully invested, reflecting continued strength and bullish trends across major market indexes. The recent breakout in small-cap stocks and the sustained uptrends in both the S&P 500 and Nasdaq 100 reinforce our confidence in maintaining full exposure to equities.

While we remain vigilant for any changes in market conditions, the broad participation and sector rotation we are witnessing suggest a healthy market environment. We are positioned to take advantage of these opportunities while closely monitoring key levels for signs of potential weakness.