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Introduction

We want to begin by thanking our subscribers for their patience and understanding while we travel abroad. Our schedule has made it difficult to maintain our normal publishing cadence, but we remain committed to delivering weekly analysis. Since launching Coiled Spring Capital in 2021, we have not missed a single weekly report, and we hope that reflects our commitment to our subscribers. As mentioned last week, reports will likely remain condensed for the remainder of our travels. We appreciate your understanding.

When we wrote in our 6/21 report to expect a choppy end to the quarter, we did not anticipate another sharp washout in technology. In classic end-of-quarter fashion, the market once again tested investors' resolve, with many of the prior leaders suffering heavy selling pressure. While portfolio rebalancing likely accounted for part of the move, the magnitude of the divergence also suggests the market may be undergoing a broader rotation beneath the surface. The major indexes finished the week with a stark split: the Dow Jones posted gains while the Nasdaq fell roughly 5%. That kind of bifurcation is difficult to ignore—and it increasingly looks like rotation is taking hold.

Much like we saw at the end of the first quarter—when we recommended selling into strength after the Energy sector rallied nearly 40%—the current market action suggests another rotation may be underway. While it's still early, the recent divergence between sectors could mark the beginning of a new leadership cycle.

It should come as no surprise that Technology dominated the second quarter, rallying roughly 26% with two trading days remaining. Conversely, Energy finished as the weakest sector—a sharp reversal from the leadership we saw earlier this year and another reminder that market leadership is constantly evolving.

Looking beneath the surface, the concentration of returns becomes even more apparent. Nine of the top ten performing stocks were leveraged to the AI infrastructure buildout, reinforcing just how dependent second-quarter performance was on a single investment theme.

Nearly half of the S&P 500's approximately 12.5% second-quarter return can be attributed to just 15 stocks, highlighting how concentrated the advance has been. Yet beneath the surface, the composition of those leaders is beginning to shift. Six of the 15 names are outside the semiconductor complex, raising an important question: Is the rally quietly broadening while most investors remain focused on AI infrastructure?

We would argue the answer is yes. In a previous report, we highlighted Financials (XLF) as a sector poised to generate alpha, and that thesis is beginning to play out. Financials gained roughly 10% during the quarter, and we believe the group can continue to outperform as interest rate expectations move lower. It's also worth remembering that Financials were the worst-performing sector in the first quarter. Even after this strong rebound, the group has only recently clawed back to roughly flat on the year, suggesting there may still be meaningful catch-up potential.

Industrials are telling a similar story. The sector broke out to new all-time highs last week and is now the second-best performing sector in Q2. We have long viewed Industrials as one of the market's best economic barometers. When economically sensitive stocks are making new highs and assuming leadership, it's difficult to build a compelling bearish case. Their relative strength suggests the market continues to discount a resilient global economy rather than an imminent slowdown.

Healthcare (XLV) is another sector supporting the rotation narrative. After posting negative returns in the first quarter, the group has staged an impressive recovery and is now testing all-time highs. The technical setup suggests a breakout is increasingly likely, and if confirmed, we would expect Healthcare to be another source of leadership and alpha during the third quarter.

Biotech (XBI) is another encouraging development. While it rarely drives the broader market, it is often an excellent gauge of investor risk appetite. The ETF registered multiple consecutive all-time highs over the past week, suggesting investors are increasingly embracing higher-beta opportunities beyond the traditional AI winners.

Remember, rotation is the lifeblood of every bull market. Capital isn't leaving the market—it is simply migrating to areas offering better risk-adjusted return potential. Don't dismiss the end-of-quarter machinations as mere portfolio rebalancing. They often provide valuable clues about where institutional money intends to be positioned for the next leg of the cycle.

This week, Healthcare has emerged as the market's leadership group, followed closely by other rate-sensitive sectors, while many of the previous leaders have come under heavy selling pressure. The market is sending a message. The only question is: are you listening?

Enough with the theory—it's time to let the charts do the talking.