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Something caught my attention recently that’s been bothering me about this market — and I think it’s worth breaking down for you as we start the week.
While we’re seeing the market essentially flat on the surface, the internal picture tells a completely different story: As of Friday morning, 34% of stocks were advancing while 63% were declining.
That’s the kind of imbalance that would normally produce a bearish session, yet the indexes still manage to hold slightly positive.
The only reason? The power of the Magnificent Seven (MAG7) was providing all the buoyancy and resiliency. In fact, I’m surprised the overall market wasn’t much higher. When a handful of mega-caps can distort the entire market’s appearance, you’re looking at a fragile structure, not a healthy one.
And this imbalance has been building since November.
The Rotation That Started in November
Back in November, we hit a point where market breadth bottomed out even as we pushed into all-time highs. The market essentially decided this concentration was too much and money started rotating away from MAG7.
For roughly two months, these mega-cap names did nothing — Nvidia (NVDA) stayed flat, Tesla (TSLA) chopped around in a $20 to $30 range, Microsoft (MSFT) showed weakness and Meta (META) declined.
That’s why I’ve started calling them the LAG7 instead.
Meanwhile, small caps bottomed in November and have been outperforming ever since, with the Russell 2000 (IWM) up about 6.5% year to date while tech has been lagging. The Nasdaq 100 (QQQ) showed strength until it topped out, then IWM started outperforming.
This is where breadth becomes critical. If this market keeps pumping the MAG7 only to dump them again and rotate out, you’re going to need broader participation to sustain anything.
A healthy bull market needs about 65% of stocks advancing and roughly 30% declining. When you get 70/30, that’s a real bull day. We’re nowhere close right now.
What This Means for the Next Few Months
As we move into a new week, I’ll be straight with you. I think the market is due for some sideways action at minimum, possibly a correction, and February through April feels like the perfect window for that.
The market simply isn’t positioned for a smooth uninterrupted climb unless participation broadens out.
This matters even more if you’re trading the semiconductor ETF (SMH) or other high-beta sectors. If the broader market chops or pulls back, it’s going to be nearly impossible for SMH to push to all-time highs. You rarely see SPY falling while SMH makes new records — the correlation doesn’t support that kind of divergence.
The concentration risk we’re seeing is creating a narrow foundation that won’t support higher highs without help from the rest of the market. If the MAG7 continues rotating in and out of favor while the majority of stocks stay weak, the market simply won’t have the fuel to accelerate.
That’s the setup I’m watching as we move deeper into Q1. The rotation away from mega-cap concentration isn’t noise — it’s a structural shift and it’s been unfolding for months. It’s going to shape how the rest of this quarter develops.
I’ll see you in the markets.
Chris Pulver
Chris Pulver Trading
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