Ever Wonder How the Market Keeps Rallying While Sectors Rotate In and Out of Favor?
Ever wonder how the market keeps rallying while sectors rotate in and out of favor? Over decades of trading since the 1990s, one recurring pattern shows up again and again: what I call “The Great Mini Rotation.” It is a simple, repeatable process where a few strong sectors lift the market, then pause, while money quietly rotates into undervalued or lagging areas that become the next leaders. Then those sectors pause and money either rotates back into the prior leading sectors or into new under valued sectors. This cycle repeats itself over and over for years.
Here’s the rhythm…
One sector leads the market higher (AI in the current cycle), while others lag (healthcare and biotech were weak for much of this year until recently). Then the leading sector pauses or pulls back as capital moves into those laggards. The former laggards start to lead and enjoy a solid run, while the original leaders rest. After some time and price action, the now-extended leaders pause again and money rotates back into former leaders or into new undervalued groups. This Great Mini Rotation keeps the major indexes grinding higher over time.
How Do I Find New Areas = Follow The Money
I use BreakoutsAndSetups.com, to see under the market’s hood. Most recently, I noticed a lot of energy stocks begin to breakout- that could become a new emerging area as AI stocks consolidate their recent rallies. A few months ago, I noticed a lot of healthcare and biotech stocks breaking out and then money rotated into healthcare and biotech stocks. Remember, the best way to see where the money is flowing is to study the price action objectively.
This constant baton-passing helps explain why the market can feel choppy day-to-day but still work its way to new highs. As long as each new sector rotation finds willing buyers, the market often avoids deep, prolonged corrections.
The Great Rotation (Old Playbook)
For decades, market strategists talked about “The Great Rotation” to describe money moving between stocks and bonds. When recession fears rose, capital rushed into bonds; when growth and earnings stories improved, it shifted back into stocks. For example, after the Federal Reserve eased policy following the 2008 financial crisis, institutions moved aggressively from bonds into stocks, fueling one of the longest bull markets in history.
During the 2020 pandemic, that process briefly reversed as investors sought safety in bonds before eventually shifting back into stocks after the Fed threw the kitchen sink at the market. Today, that broad, all-or-nothing rotation between stocks and bonds feels less dominant, because markets often stay invested in equities while leadership keeps changing inside the stock market itself.
The Great Mini Rotation (New Playbook)
The Great Mini Rotation is the quiet, almost rhythmic shifting of money from one part of the stock market to another. For a period, technology and gold stocks may lead; then they cool, and investors rotate into neglected sectors like healthcare or biotech. When those start to look overbought, the baton passes back to earlier winners or into new undervalued areas such as energy.
Through these short, overlapping rotations, the market as a whole can drift higher even while individual sectors are resting or pulling back. Instead of one big surge followed by a crash, you see a series of smaller surges and rests, with leadership changing hands along the way. Eventually, stocks will enter a bear market but until then, this great mini rotation can help this bull market race higher.
Rhythm Beneath the Rally
Under the surface, the Great Mini Rotation has been a consistent feature of many bull markets since the 1990s. Here is how it often unfolds in simple terms:
- A handful of sectors—such as AI, technology, & semiconductors —ignite a strong rally.
- As valuations stretch and traders take profits, those leaders lose momentum.
- At the same time, lagging sectors—like industrials, healthcare, biotech, utilities, energy, or small-cap cyclicals—attract bargain hunters and institutional inflows.
The laggards rally, offsetting weakness in the prior leaders and helping prevent the major indexes from breaking down. That also gives leading sectors a chance to consolidate the recent run and set the stage (build a new base) for the next leg higher.
The beauty of this pattern is stability through movement. Capital does not flee the market; it simply “rotates”, so while one group catches its breath, another stands up to run.
Sector Spotlights: 2025 in Motion
Recent market action in 2025 offers a clear illustration of this pattern. The year began with a surge in artificial-intelligence-linked names, especially Nvidia, Palantir, & Microsoft. AI stocks helped drive a strong rally in the Nasdaq (tech heavy index).
By fall, many of these stocks looked stretched and began to cool as traders locked in gains. As tech paused, money rotated into undervalued areas like healthcare and biotech stocks. Then, down the road, money might flow back into tech, and this cycle repeats itself over and over again.
Winners and Losers Shift, but the Market Rises
Mini rotations create conditions that reward patience. Instead of one big wave lifting everything, different waves take turns. For example, AI stocks led the market higher. Then, as their valuations got stretched, investors shifted into undervalued areas and those areas helped the market recover. Each time, money didn’t disappear; it simply moved. This process also smooths volatility for the major indices. The market only “fell” single digits from recent highs while most AI stocks fell double digits.
A Market of Rotations, Not Rallies
To traders raised on the idea of “the market rallying or selling off,” or “risk on vs risk off” – mini rotations can be confusing. The indexes might trade flat for weeks even as some industry groups explode upward. That’s because the modern market behaves more like an ecosystem than a single organism. Just as different species in a forest thrive at different times of year, various sectors bloom and fade in economic microclimates.
When interest rates dip, utilities and real estate may perk up. When commodity prices rise, metals and materials surge. When productivity and AI dominate headlines, tech leads. These sectoral “seasons” rotate in quick succession.
Implications for Investors
For long-term investors, the Great Mini Rotation offers both comfort and challenge. Comfort, because steady sector reallocation prevents the market from overheating as it did in past manias. On the other hand, it can be a challenge, because it requires discernment. Active managers must stay nimble—recognizing when leaders are tired and when laggards are heating up.
Tactical investors might use mini rotations to rebalance portfolios across sectors showing improving relative performance. It’s more about aligning with the rhythm of the market. I call it being in “har-money” with the market (it’s a play on the word harmony).
Risks of the Mini Rotation
The biggest risk with mini rotations is complacency. Investors may assume the constant sector swapping will always support the indexes, only to be caught off guard when all sectors pull back simultaneously. That can happen if a major macro shock—like a geopolitical crisis or policy surprise—affects every corner of the market at once. When liquidity dries up, even sector diversification doesn’t help.
Additionally, investors chasing each new rotation may overtrade, racking up costs and missing the bigger trend. The best approach often blends patience with selective opportunism: stay widely diversified, but lean slightly toward whichever areas show improving fundamentals.
The Institutional Perspective
This rhythm shows up clearly in institutional data. Fund managers track “sector drift,” or how far their portfolios deviate from benchmark sector weights over time. In 2025, those drifts have oscillated faster than any year since 2018.
Asset allocators report keeping portfolios almost fully invested but frequently shuffling exposure between growth-oriented and value-oriented buckets. Hedge funds, for example, have been lightening up on high-flying tech after rallies and adding to beaten-down cyclicals—then reversing those moves a few months later.
This pattern supports the idea that the bull market isn’t overextended but rather self-correcting through internal rotation.
Confidence Through Contrast
The Great Mini Rotation also reflects confidence beneath the surface. Investors aren’t fleeing equities; they’re reallocating within them. That distinction matters.
Contrast that with bear-market environments, where everything falls together. In those periods, there’s no rotation—only liquidation. Today’s alternating leadership signals enduring appetites for risk and optimism about earnings growth.
Indeed, even as sectors trade off leadership roles, forward earnings estimates for the S&P 500 continue climbing, indicating broad corporate resilience.
The Market’s Hidden Engine
To casual observers, the stock market’s ability to rise despite constant crosscurrents seems mysterious. But viewed through the lens of the Great Mini Rotation, it makes sense.
Instead of one big engine pulling the market train, imagine a series of smaller engines taking turns. Each blasts forward for a stretch, then coasts while another fires up. The train keeps rolling down the track—not through explosive acceleration, but through continuous exchange of energy among its cars.
That’s the essence of this new phase: small, sequential leadership rotations keeping the market dynamic and self-sustaining.
What Comes Next
If history serves as a guide, these rotations eventually consolidate. When enough sectors participate simultaneously, a broader bull-phase acceleration can occur.
With earnings growth firming, inflation cooling, and the Federal Reserve signaling stability, markets appear positioned for that next synchronized move. Still, until one dominant trend emerges, expect these miniature rotations to continue shaping day-to-day action. That’s not a sign of confusion. It’s a sign of health.
A New Market Normal
In an era defined by liquidity abundance, algorithmic precision, and 24-hour news cycles, markets no longer move in old binary ways. The Great Mini Rotation may not make headlines the way the Great Rotation once did, but it’s arguably more important. And persistence, in markets as in nature, is a powerful force.