Here's why the 'immaculate rotation' across sectors is driving the market

The pat and popular stock-market story this spring goes like this: A small group of lavishly capitalized tech stocks, anointed by the pundits and adored by the momentum crowd, have dragged an otherwise sluggish tape to a grudging record high.

This is both inaccurate and less interesting than the reality.

For sure, Big Tech has been the clear leader, returning 20 percent so far this year. But between March 1, when the Standard & Poor's 500 first touched 2,400, and last week, when it closed slightly above that level three days straight, the market has been held aloft by a fairly broad but constantly shifting collection of stocks and sectors.

The running tally of rising stocks versus decliners, known as the cumulative advance-decline line, is at an all-time high along with the S&P 500. The equal-weighted version of the index, gauged by the Guggenheim S&P 500 Equal Weight ETF (RSP), is just half a percent below its record peak.

Goldman Sachs maintains a market-breadth index to track the inclusiveness of the market trend. It's now at 25, on a hypothetical scale from zero to 100. The 30-year average is 35, so the market has been somewhat less broad than usual. But in 2015, the year of the mania over high-tech FANG stocks, the index sank to 5, signaling acute narrowness.

Meantime, today, five of the 10 traditional S&P sectors have outperformed the index itself year to date. And, crucially, U.S. stocks have won affirmation from foreign markets, with the MSCI All-Country World Index also stretching to a new high recently.

So, finding winning stocks is not quite like shooting fish in a barrel, but dropping a line in will usually draw enough bites to keep it interesting.

The odd wrinkle right now is the way, on a given day, it's as if sectors take turns holding up the market. The unusual combination of high-momentum tech and boring, defensive sectors have shared leadership. Bespoke Investment Group notes the uncommon setup right now: The market is in record territory, yet the most "overbought" groups are consumer staples and utilities.

On days when Treasury yields rise a bit and those "bond-proxy" sectors take a breather, the lagging bank and transportation stocks will bounce and keep the market from losing much ground, if any. Think of a basketball team whose bench players keep the game close while the stars sit out to rest.

One traditional technical sign of a powerful daily move is 90 percent or more of stocks surging or selling off in near-unison. There hasn't been a "90 percent day" since Oct. 11, and the last one on an up day was July 8.

Larry McMillan of the investment-advisory service The Option Strategist says: "It is unusual to go this long without a 90 percent day of either kind, but it is an accurate reflection of the type of market that has existed since the election: No matter which way the market goes, there always seem to be a decent number of stocks going the other way."

So what's the larger message of this "immaculate rotation" that's been animating the market?

For one thing, it suggests little urgency for investors to exit stocks even when the occasional data release is poor or the Treasury yield curve flattens a bit more. Money seems to slide around to another part of the market, even as new inflows to stock funds have been tepid and uneven.

This might indicate a broad agreement right now on the global macro outlook. Not blind group-think, but a preponderance of evidence that worldwide growth has firmed, credit markets remain sturdy and most of the risks or stress points are not yet imminent threats (whether an inflation overshoot, dip into deflation, central-bank tightening or a financial accident in China).

The push-pull of equity rotation is also a key factor in keeping volatility at such a numbingly low idle in recent months. When there is a lot of offsetting action among stocks and sectors, index-level volatility is stifled. This never lasts forever, and the odds say the tape will become more jumpy — and almost can't get more calm. But this isn't a very helpful observation for timing or sizing the next significant move.

The almost coordinated-seeming oscillation among sectors has also, for better and worse, kept the market from undergoing a nice cleansing washout for months. The little 3 percent dip in March was mild and fleeting, and never really flushed the market to create a nice oversold condition that could reset investor sentiment and set up a slingshot move higher for a high-energy run higher.

That's well and good, and breakouts to new highs are always to be respected, even if they come in the recent grinding fashion.

Urban Carmel of the Fat Pitch blog points out that the recent extreme calm and a variety of other factors argue against the idea that a significant market top is near. For one thing, bull markets tend to falter and weaken in more visible ways before peaking, he says.

Yet, if the S&P 500 goes another 3½ weeks without sliding by 5 percent, it will become the longest streak without such a setback since 2009, and one of the dozen longest periods without a 5 percent drop since the 1930s.

This is both a sign of strength, and a suggestion that the odds continue to get longer for stocks to remain this unflappable. This is an expensive market that has been impressive in refusing plenty of excuses to get spooked. We've used up the likely best quarter of earnings growth this year: June brings a tougher seasonal record, bank stocks are struggling and hints of complacency are growing.

The key is not to start betting on an immediate market failure, but to recognize the market is selective in its rewards and expect a stiffer downside test relatively soon. Chances are, it won't be The Big One.