This time, it is not rotation. The US equity market is playing a one?way game. Not only tech giants are being sold but also small?cap companies sensitive to the economic cycle. Nine of 11 S&P 500 sectors closed the trading day in the red, and the market?cap?weighted broad index has pulled back from record highs.

Each group has its own weakness. Software makers led the market for a long time because AI was expected to accelerate development. Once it became clear that AI could perform tasks that had earned programmers large sums, the sell?off began. The problem is that it's hard to exit crowded trades. Hence the worst three?day plunge in the Nasdaq Composite since April.

Dynamics of US equity indices

However, the Russell 2000 names have their Achilles' heel too. They had risen on rotation and hopes of faster US economic growth due to tax cuts and AI. Worrying US labor market data, however, have undermined investor confidence that small caps are the optimal bet.

In December, US job openings fell to the lowest level since 2020, and initial jobless claims rose faster than expected. The most sobering news came from Challenger: the alternative?data provider reported the largest job?cut wave since the 2008–2009 global financial crisis. Given disappointing ADP private sector employment figures, the labor market cooling is evident. That suggests the economy is not as robust as it appears.

In fact, old relationships may no longer hold. The White House and Kevin Warsh argue that inflation may slow even with strong GDP. Why not assume the same for unemployment? Yes, AI displaces US workers, but productivity gains could allow the economy to accelerate further.

S&P 500 and moving average dynamics

While AI and Donald Trump's policies rewrite chapters in fundamental analysis textbooks, traders find it easier to turn to well?known technicals. The S&P 500 is testing its 100?day moving average. In November, the broad index bounced from that level thanks to massive dip buying. However, if February's sell?off continues, we can talk about serious structural changes in the US equity market. Will it cross into "bear" territory?

Technically, the daily S&P 500 chart continues to show a 1-2-3 reversal pattern. Short positions opened from 6,820 should be maintained. If bulls fail to push the broad index back above key pivot support levels at 6,815 and 6,835, that will signal their weakness and provide grounds to add to short positions.