The S&P 500 had a rough week.

If you owned the right stocks, you might not have noticed.

That’s really the point of this entire exercise.

We’re still in a bull market.

The primary trend remains higher, long term breadth is healthy, and I’m not seeing anything in the bigger picture that changes that.

So I’m approaching this market the same way I approach most Bull markets.

Being opportunistic and owning leadership.

The interesting part right now is that leadership looks increasingly different from the S&P 500 itself.

Let’s get into it.

Every week I run breadth across the major sectors, looking at the percentage of stocks above various moving averages.

Lately, some of the strongest participation has been coming from places most investors would probably describe as boring.

Healthcare. Energy. Materials. Financials.

Meanwhile, technology, the largest weight in the S&P 500 by a mile, is taking a breather.

That got me thinking.

How much of the market’s current leadership does the S&P 500 actually own?

So I pulled every S&P 500 constituent and measured how far each stock was from its 52 week high.

Here are the four numbers that tell the story:

85 stocks in the S&P 500 are currently within 5% of a 52 week high.

Those 85 stocks represent only 15.5% of the index’s weight.

Of the S&P 500’s 73 Information Technology stocks, only two are within 5% of a 52 week high.

Technology, meanwhile, represents roughly 37% of the entire index.

That’s a pretty interesting disconnect.

The sector carrying more than a third of the S&P 500’s weight is producing almost none of the stocks currently sitting near highs.

Meanwhile, leadership is showing up somewhere else.

Healthcare is 9.5% of the index, but represents 27.1% of the stocks near 52 week highs.

I wrote a quick note on Healthcare earlier this week.

Energy is only 3.5% of the S&P 500, but represents 11.8% of the leadership group.

Materials represents just 1.8% of the index, but almost 6% of the stocks near highs.

Financials are 12.2% of the index, but account for 16.5% of the near high group.

Then there’s technology.

37.4% of the index. Just 2.4% of the stocks near highs.

That helps explain how the S&P 500 can have a mediocre week while plenty of stocks underneath the surface are doing just fine.

And there’s an important nuance here.

This isn’t simply a small stocks versus big stocks story.

The 85 stocks near highs represent roughly 17% of S&P 500 constituents and 15.5% of its weight.

This is a sector rotation story.

Healthcare, energy, financials and materials are producing a disproportionate amount of the current leadership…but you don’t own it buy the indexes.

This is where the charts make the data much more tangible.

Take energy.

The S&P 500 gives you roughly 3.5% exposure to energy.

The Nasdaq 100 gives you almost none.

Yet XLE just broke through another major resistance area and continues to make higher highs.

That doesn’t mean energy can’t pull back.

It doesn’t mean we blindly chase anything with an energy ticker.

It means when I’m looking for places to increase exposure in a bull market, this is where I want to be digging.

Materials tell a similar story.

The S&P 500 gives you roughly 2% exposure to materials, yet XLB continues to press against the top of a large base after already breaking through a major resistance level earlier this year.

And underneath the sector ETF, the individual stocks make the point even clearer.

Freeport McMoRan has now broken above a resistance zone that dates all the way back to the 2008 and 2011 highs.

That’s not a three week breakout.

That’s a multi decade breakout.

Southern Copper is doing something similar on a shorter time frame. After spending most of the year building a large base beneath its prior highs, SCCO is now pushing through that resistance.

This is exactly what I mean when I talk about owning leadership.

I don’t need a narrative telling me copper should go higher.

I don’t need to predict where energy prices are six months from now.

I’ve got price telling me where money is already flowing.

This is how we generate alpha.

We don’t have to own what the index owns.

And as individual investors, we’ve got a flexibility that the S&P 500 doesn’t.

We can zig while the index zags.

If healthcare is producing leadership, we can increase exposure to healthcare.

If energy is breaking out while representing only 3.5% of the index, we can own more energy.

If materials are producing new highs while the S&P 500 gives us less than 2% exposure, we can go hunting through materials.

And if individual names like FCX and SCCO are confirming what we’re seeing at the sector level, that gives us another piece of evidence.

That doesn’t mean I’m selling every technology position I own.

It doesn’t mean mega cap technology is dead.

And it certainly doesn’t mean I know how long this rotation lasts.

I don’t need to know.

I want to own leadership while it’s leadership, manage risk around my positions, and let the market tell me when something has changed.

That’s the beauty of the process.

We align with the market and let the market do the work.

Owning the S&P 500 has been a fantastic strategy.

But remember what you’re actually buying.

You’re buying a market cap weighted portfolio where an enormous amount of your exposure is concentrated in technology and a handful of massive companies.

Right now, many of the stocks doing the best work live somewhere else.

To me, that’s not bearish.

It’s opportunity.

There are plenty of stocks working in this bull market.

You just might have to look somewhere other than the front page of the S&P 500 to find them.

Keep watching the tape.

Keep digging through the boring areas.

Keep following leadership wherever it goes.

Don’t let the S&P 500 own you.

Anyway, that’s my two cents.

🚀 Throw it on 1.5x speed and let it rip.

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The Sunday Stalk List

Tomorrow, I’ll break down more of what I’m buying in the Sunday Stalk List.

If you want clean charts, clear setups, and tactical insights, this one’s for you.

It hits your inbox every Sunday so you know exactly what to stalk for the week ahead.

Cheers,

Larry Thompson, CMT CPA

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