Last month’s enthusiasm is nothing more than a fond memory.

Sure, the S&P 500 keeps rallying. But your trading account is mired in red. Hands shake. Palms sweat. Your stomach turns. The thought of an imminent selloff crawls across your skin with a conviction that bores to the bone.

The warning signs have been flashing…

Speculators can legally place a wager on almost anything. New IPOs like Gemini Space Station, Inc. (GEMI) are flopping. Perhaps most concerning of all, private equity funds now outnumber McDonald’s worldwide. (Yikes!)

Meanwhile, one cataclysmic news event appears after another — the trade war, the government shutdown, and the National Guard deployment coming to a town near you.

But the stock market trudges higher.

If investors have every reason to be spooked and the extended rally is turning full-blown silly, why aren’t stocks rolling over?

Well, the truth is simple: most stocks aren’t looking so hot right now.

In fact, stock market breadth flat out stinks. More than half of the NYSE offerings are trading below their 50-day moving averages. That’s right, your favorite tickers likely slipped out the back weeks ago.

Of course, you’d never catch the slightest hint of this sneaky correction by sitting in front of the indexes. They’re built to deceive. But take a closer look at what's happening behind the S&P 500’s facade and you’ll start to notice you're already living the imminent correction.

Let me explain… 

Cap-weighted Indexes Mask the Damage

The U.S. equity benchmark favors the most prominent companies. (The larger the capitalization, the larger the stock’s impact on the index’s movement.)

Last week, the S&P 500 closed higher (along with the other major averages), but less than 50% of the index finished above their intermediate-term (50-day) average.

The S&P 500's structure is undoubtedly driving this disconnect between the index and what’s actually happening beneath the surface. Nvidia Corporation (NVDA) and the rest of SPY’s top ten holdings account for almost 40% of the index, and only two out of ten are trading below their respective 50-day moving average: Amazon..com, Inc. (AMZN) and Meta Platforms, Inc. (META).

On the flip side, Alphabet Inc. (GOOG) and Apple Inc. (AAPL) just closed at record highs, so a little more than 30% of the U.S. benchmark remains incredibly resilient. That explains how stocks appear to “only go up.”

Looks can be deceiving. 

Leadership Chills

Technology stocks have undoubtedly led the charge off the April lows.

The SPDR Technology Sector ETF (XLK) is up 49% over the trailing six months compared to the staples sector’s dismal -1.80%. Meanwhile, the SPDR Communications Sector ETF (XLC) comes in second, up roughly 30% over the same timeframe, almost 20% behind the technology sector. 

However, tech stocks have taken a chill pill. Half of this leadership goup, 41 out of 82 names in the S&P, are churning below their intermediate-term moving averages as of last Friday’s close. But you can’t see it on the XLK chart…

The weakness simply isn’t visible due to XLK’s its similar cap-weighted structure (much like the broader index). Nevertheless, half of the etf’s components are trading down around that big red “X.”

Momentum is also resetting as tech corrects beneath the surface. In fact, the 14-day RSI is bouncing at the same levels it did while it corrected sideways from August through September earlier this year (highlighted in the lower pane). That correction came to an abrupt end roughly a week before the FOMC cut the Fed fund rate by 25 bps.

We’re now five sessions away from another potential rate cut, which could be a catalyst for the next leg higher in equities. Perhaps the market will choose to induce anxiety by marking time until next Wednesday and then rocket higher. We’ll see.

Defensive Sectors Take the Lead

As of last Friday, only two sectors had the majority of their stocks above the 50-day moving average: Utilities and Healthcare. Analysts consider both groups to be defensive in nature, especially utilities.

My mind immediately ran to Constellation Energy Corporation (CEG) when utilities popped up on my scans. But the nuclear energy AI plays aren’t shouldering the utility sector’s strength alone. Surprisingly, all 31 utility stocks in the S&P 500 are trading above their respective 50-day moving averages. And most are trading at or near 52-week highs, even names such as Dominion Energy, Inc. (D). No other sector can make that claim.

Add healthcare, the next best-performing sector over the trailing 1-month returns, to the mix, and you have a classic defensive rotation that’s been underway for weeks.

So, eight of the largest stocks in the S&P 500 that account for roughly 30% of the index are bolstering SPY’s new highs. Defensive sectors are outperforming their speculative peers. And half of the U.S. benchmark’s tech names, far and away the best group of stocks off the April lows, are churning below their 50-day moving average.

Sounds like a correction to me.

Sure, stocks could drop hard in the coming weeks. Or they could chop sideways until the next rate cut and then explode to record highs.

Either way, the market has been correcting. The indexes hide this simple truth, but you’ve felt it for weeks.

If you’re planning to try and catch the next leg higher, be sure to pick your spots wisely, use tight stops, and trade small.