It was interesting to see Consumer Discretionary (XLY) lead the way on the downside yesterday, after that better-than-expected retail sales report. Investors were reminded that momentum stocks swing both ways.

Rotation Speeds Up

It was the session I had been warning would be typical in 2026, where the major indices were down, as rotation shifted into full effect. There were far more advancers than decliners, even on the NASDAQ Composite.

In the past, when the market was down more than 0.5%, while more than 60% of names finished higher, the market rallied in the ensuing sessions.

Move Over Hot Stocks

Mega-cap names continue to move away from the all-time highs:

• Meta Platforms ($META): -21%
• Microsoft ($MSFT): -16%
• Nvidia ($NVDA): -13%
• Tesla ($TSLA): -11%
• Apple ($AAPL): -10%
• Amazon ($AMZN): -6%
• Google ($GOOG/L): 0%

And small-caps keep coming on strong.

Taking the Lead

It has been years since the iShares Russell 2000 ETF (IWM) outperformed the S&P 500 (SPX) (see above). One could easily argue that the Russell 2000 was due to have a better year than the S&P 500 based only on historical trends.

Tortoise & the Hare

However, it's also surging against the NASDAQ-100 (QQQ), after breaking through the key moving average late last year, and then holding above it; it's been no contest.

Software’s Soft Underbelly

The media’s focus is on “Mag Seven,” but the real damage is in software stocks (IGV), where the narrative has re-emerged; they are getting their clocks cleaned by artificial intelligence (AI).

Today’s Session

The market looks a little different today, with Taiwan Semiconductor (TSM) coming to the rescue.

It's not the first time the company has reported and scotched growing anxiety.

The guidance is remarkable.

Q1’26 Guidance:

• Revenue: $34.6 – $35.8B (Est. $33.2B); +4% QoQ & +38% YoY
• Gross Margin: 63% – 65% (Est. 59.6%)
• Operating Margin: 54% – 56% (Est. 50.0%)

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