| By Harry Boxer, Technical Market Analyst
Market Rotation Accelerates in Early 2026
The rotation in market leadership that began in November has accelerated in the early weeks of 2026, sending a distinctly pro-cyclical signal. Small- and mid-caps, value stocks, international equities, and cyclical sectors such as materials, industrials, and consumer discretionary are outperforming—a stark contrast to the narrow, mega-cap-led leadership of the past three years . The common thread across these areas is that they tend to benefit most from an improving economic outlook and the prospect of Fed easing.
Major Indexes Stall as Small Caps Continue to Outperform
The major U.S. indexes posted fractional declines as stocks failed to maintain the previous week’s upward momentum. The S&P 500 traded within a narrow range as earnings season opened, finishing the week 0.5% below a record high that it set on Monday. Nasdaq lead with a loss of 0.7%
The Russell 200 small-cap benchmark outpaced its large-cap peers by a wide margin for the second week in a row, marking a sharp rotation from small caps’ lagging 2025 performance. With its more than 2% weekly gain, the Russell 2000 Index was up nearly 8% on a year-to-date basis versus less than 2% for a comparable large-cap index.
Sector Performance Highlights Rotation
Sector-wise, for the week, the Real Estate sector led all groups with a gain of nearly 4% with the Consumer Staples sector just behind at +3.7%. Leading losers were the Financials -2.3% and the Consumer Discretionary group off 2%
Mega-Cap Tech and Software Divergence Deepens
Divergence continues to develop within mega-cap tech, software and chip stocks, as investors attempt to discern how AI adoption will potentially disrupt business models from former leaders. We have recently seen a divergence in mega-cap tech (AAPL, MSFT, META relative underperformers, GOOGL, AMZN winners), and to some extent within the semiconductor space (semiconductor equipment manufacturers and memory stocks outperforming), and this week software stocks came under pressure.
Multiple familiar large-cap software stocks have fallen to fresh 52-week lows this week: Adobe Systems (ADBE), Atlassian Corp. (TEAM), Docusign (DOCU), HubSpot (HUBS), Monday.com (MNDY), Salesforce (CRM), ServiceNow (NOW) and Workday (WDAY). The bearish narrative that has been developing is that AI companies like OpenAI and Anthropic will disrupt traditional software business models. However, it should be noted that several analysts came out in defense of these traditional players, calling the selling overdone and potentially a buying opportunity.
Technical Warning Signals to Monitor
In addition, I wanted to note that a serious negative divergence on the S&P 500 MACD continues to build, and yet has not affected price for the moment. We’ll need to monitor that closely.
Internationally, the major Japanese stock market benchmark surged 4.2% for the week, surpassing a record high set the previous week. Since mid-December, the index has gained more than 10%
Key Technical Levels
KEY technical levels to be aware of going forward: The SPX resistance is now clearly at the 6885-93 zone. A strong surge above that might get to 7070-75 then possibly 7149-50. Chart support can be seen near 6885, 6835, then 6620-22. Should those levels be penetrated we may see tests of 6620 & 6520
As to the trailing Nasdaq 100 or NDX : Key resistance now at 25875-85 & 26180-85 Support looks to be near 25085, 24645 & 23855.
In any case, as we always do at thetechtrader.com, we’ll “Trade What We See, Not What We Think”
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