January 12, 2026
While most retail investors fixate on the S&P 500 hitting new 52-week highs, a dramatic rotation is underway beneath the surface that could reshape portfolios in the months ahead. The data tells a story of shifting leadership that contradicts the "just buy tech" narrative that has dominated for years.
The defense sector is experiencing a historic breakout that few are discussing. ITA (iShares U.S. Aerospace & Defense ETF) relative to SPY has reached its 99th percentile across every timeframe from 52 weeks to 208 weeks—a level of sustained outperformance rarely seen in any sector.
Even more striking: the ITA/SPY ratio shows breakouts confirmed across all timeframes with high R-squared values (0.77-0.91), indicating this isn't noise—it's a structural trend. Defense stocks aren't just outperforming; they're doing so with unusual consistency.
The XAR (SPDR S&P Aerospace & Defense ETF), which captures smaller defense names, shows even stronger relative performance versus industrials (XAR/XLI at 99th percentile with 0.88 R-squared on the 52-week timeframe). This breadth suggests the rally extends beyond just the mega-cap contractors.
Precious metals are staging a comeback that has caught most investors off guard. Gold relative to SPY (GLD/SPY) sits at the 92nd percentile on the 13-week timeframe and 99th percentile on 208-week, with strong trend reliability (R² of 0.85 short-term, 0.80 long-term).
But silver is the real story. SLV/GLD shows a 92nd percentile reading with 0.93 R-squared—silver is outperforming gold with remarkable consistency. This typically signals industrial demand returning, often a bullish macro signal.
The mining stocks are confirming: GDX/SPY at 92nd percentile across nearly all timeframes, with gold miners (GDX) outperforming gold itself (GDX/GLD at 98th percentile on 52-week). When miners lead, it often signals the precious metals rally has legs.
Here's the rotation most are ignoring: Consumer discretionary (XLY) relative to SPY has cratered to its 4.8th percentile on 104-week and 2.4th percentile on 208-week timeframes. The slope is -14.43% weekly with high reliability (R² of 0.76).
The XLY/XLP ratio (discretionary vs. staples—the classic risk-on gauge) confirms the damage, sitting at historically depressed levels. This isn't just sector rotation; it's a consumer confidence warning signal.
Retail (XRT) tells a different story, however. XRT/XLY has surged to the 92nd percentile on 52-week, suggesting equal-weight retail is dramatically outperforming the Amazon-heavy discretionary sector. The "everything store" may be losing its grip.
Energy (XLE/SPY) has collapsed to its 1st-4th percentile across all timeframes—a historically extreme reading. While the trend remains firmly negative, contrarians should note: readings this compressed often precede reversals.
Notably, AMLP (MLPs) and OIH (oil services) are showing relative strength versus XLE itself, suggesting smart money may be positioning in energy sub-sectors even as the broader sector struggles.
IWM/SPY has climbed to the 92nd percentile on 13-week—small caps are outperforming near-term. But look deeper: the 104-week reading sits at just the 54th percentile, and 208-week remains depressed at the 27th percentile.
This looks more like a tactical bounce than a structural shift. The quality factor (SPHQ/SPLV at 99th percentile) confirms investors still favor quality over cheap beta.
SMH/SPY remains in an uptrend (92nd percentile on 13-week, 99th percentile on 104-week), but acceleration is slowing. The SMH/IGV ratio shows semis dramatically outperforming software (98th percentile on 52-week with 0.82 R-squared), continuing the "AI infrastructure over AI applications" theme.
Watch for signs of exhaustion here—semiconductor leadership has been the market's backbone for years.
Perhaps the most overlooked signal: EEM/SPY (emerging markets vs. US) has surged to the 96th-99th percentile on 26-week through 104-week timeframes, with breakouts confirmed. After years of US exceptionalism, capital is quietly flowing back to emerging markets.
Europe (IEV/SPY, EFA/SPY) shows similar patterns—92nd percentile readings across short-term timeframes with confirmed breakouts.
The market is telling a complex story:
- Risk-on, but selective: Small caps and EM bouncing, but quality still matters
- Inflation hedges working: Gold, silver, and miners leading
- Consumer stress signals: Discretionary collapse, but retail breadth improving
- Defense as new leadership: A multi-year structural trend, not just momentum
- Tech still matters, but narrow: Semis lead, software lags
The retail investor chasing last year's winners may find themselves on the wrong side of a rotation that's already well underway. The smart money appears to be hedging US equity concentration with international exposure, adding precious metals, and rotating into defense—all while the headline indices mask the turmoil beneath.
Data as of January 12, 2026. SPY closed at $695.16, a new 52-week high, with YTD return of 0.16%.