Sector Rotation: Why the S&P 500 Fell but Most Stocks Rose

Summary

Craig Tapping argues that the S&P 500’s recent weakness reflects rotation between sectors and company sizes, not a broad exodus from equities. While large technology and hardware stocks have sold off, market breadth has improved and money has moved into areas that had lagged, including defensive sectors and software.

Positioning and recent market action

• Tapping says he shifted to a more defensive portfolio stance on August 18. He exited many small-cap assets, retained his long-term large-cap strategy, and looked to utilities, consumer staples, and healthcare for greater resilience.
• After a significant September sell-off, he expected an October rebound in oversold sectors and says many sectors subsequently recovered.
• He sees no clear evidence of a market-wide sell-off, though he considers the market late in its cycle and warns that the timing of a potential major peak is uncertain.

Breadth, technical signals, and market performance

On the S&P 500 daily chart, Tapping identifies a small rising wedge, or terminal diagonal, which he describes as a typically bearish, narrowing pattern. He cautions that it does not necessarily signal an immediate decline.

He says the latest advance occurred on lower trading volume and with lower RSI highs, which he interprets as weakening momentum. Meanwhile, RSP, the equal-weight S&P 500 ETF, had lagged while the cap-weighted index made highs, indicating weak participation by the average constituent. More recently, RSP has rebounded even as the S&P 500 and SPY weakened.

The share of S&P 500 stocks above their 50-day moving average reportedly rose from about 20–21% to 58%. Tapping views this as improving breadth despite headline-index weakness. He also says the S&P 500 is testing a former resistance area that has become support, and that whether it holds is an important near-term signal.

Performance cited from the end of August to the time of the video:

Index or market segment Performance S&P 500 −1% Dow Jones Industrial Average −1% ASX XJO −3% Nasdaq −3% ASX mid-caps −4.87% Russell 2000 −9% ASX small-caps −13% ASX micro-caps −13.5%

Tapping attributes small-cap weakness to higher interest rates. Smaller companies tend to carry more debt relative to equity and face greater pressure on profitability, while large and mega-cap firms generally have more cash and liquidity.

Sector and industry rotation

Tapping says technology, communications, and industrials were among the weaker areas in the October period he discusses. Money rotated toward energy, consumer staples, utilities, healthcare, materials, financials, and—to a more modest extent—real estate.

Within technology, he distinguishes hardware, especially semiconductors and RAM, from software. He says investors have taken profits in hardware after strong gains and shifted toward cloud technology, cybersecurity, technology services, software, and applications. He reports gains of roughly 24–51% for those software-related groups over the preceding three-and-a-half to nearly four months.

His interpretation is that this is rotation within technology rather than a wholesale exit from the sector. He also cautions that strong advances can be followed by corrections.

Long-term cycle and commodities outlook

Tapping considers the market to be at a very late stage of its cycle, but says a peak could already have occurred or could still be 3, 6, 9, or 12 months away. He stresses that markets can keep rising despite bearish indicators.

He cites two cycle frameworks:

• The 18.6-year real-estate cycle, which he says points to a possible bottom around 2027 when counted from 2009.
• The Benner cycle, which he says points to a peak in 2026 and a bottom in 2032.

Historical examples he gives include:

• After the March 2000 peak, the S&P 500 fell about 50% and the Nasdaq about 60% through 2002.
• The S&P 500 then rebounded about 103% over the following four to five years, before forming a double top around 2007 and declining into the 2009 low.
• He says the recovery to the prior portfolio value took about 13 years, excluding inflation.
• Other historical drawdowns cited include about 86% during the Great Depression and 55% in a major 1940s correction.

Tapping says that from 2000, the S&P 500 gained about 470%, versus roughly 70% for commodities. He argues that commodities could outperform in a future correction or commodity cycle, pointing to potential demand for materials and energy from AI data centers, infrastructure, robotics, automation, the energy transition, and biotechnology.

For Australia, he says the XJO rose 154% from 2000 to 2007, while the Australian market has lagged the US since the global financial crisis because it is more dependent on financials and resources. He believes Australian resources may still have room to grow, even if US equities are closer to a cyclical peak.

Methodology and decision framework

Tapping describes a framework that includes:

• Assessing market breadth alongside headline index performance, including comparing cap-weighted SPY/S&P 500 with equal-weight RSP.
• Tracking the percentage of constituents above their 50-day moving average.
• Evaluating volume, RSI momentum, chart structure, and key support and resistance rather than relying on price highs alone.
• Considering how interest-rate changes affect companies differently, especially small caps versus cash-rich large caps.
• Examining sector and industry performance for rotation, including shifts within technology from hardware to software.
• Using historical and long-cycle comparisons as context while recognizing that cycle timing is uncertain.

Key cautions and disclosures

• A rising wedge and bearish momentum signals do not establish that a sell-off will happen immediately.
• A potential major peak could be months away, and markets may continue rising despite weak indicators.
• The subtitles include potentially inconsistent year references, including references to 2025 and 2026, so the timing of some market data is unclear.
• No explicit “not financial advice” disclaimer is stated in the subtitles.

Presenter and sources

• Presenter: Craig Tapping, described as an analyst and teacher at Mastering the Markets.
• Other sources: No external research provider or data source is named in the subtitles.