The Market Needs to Rally or We Could Be in Serious Trouble

by Roger Scott | Dec 12, 2025

I’ve been watching something develop over the last few days that’s got me paying very close attention — and with Thursday’s close behind us, the picture is getting even clearer.

The Dow rose 646 points, the S&P 500 rose 0.2%, the Nasdaq 100 (QQQ) fell 0.3%, and the Russell 2000 (IWM) rose 1.17%. That divergence tells you everything about where strength is — and where it isn’t.

The equal-weighted S&P 500 ETF (RSP) recently made an all-time high, which should be bullish on its face. But there’s still a problem…

The regular S&P 500 (SPY) can’t break to new highs, QQQ continues to slip, and mega-cap stocks completely failed to participate in yesterday’s rally. When the biggest names refuse to move, that creates a ceiling the market can’t climb through.

Even more telling, Microsoft (MSFT) showed up on my short watchlist. The Semiconductor Sector (SMH) has been trying to rally on almost no volume, and equal-weighted tech isn’t showing the kind of participation you’d expect if this were a strong broad-based move.

Without real buying pressure in the biggest stocks, every inch higher gets harder.

Small Caps Are Quietly Sending a Message

Now, there is a bright side — and it’s not a small one. IWM is making strong moves, and the Russell 2000 is interest rate sensitive. When small caps start breaking out while mega caps stall, it often signals early stage sector rotation.

That kind of rotation can be very bullish because it shows investors are willing to move down the risk curve.

Small caps usually lead into bullish markets. They don’t like bearish environments and when they start outperforming, it’s often because money is rotating into the areas that benefit most from improving conditions.

The RSP breakout on real volume reinforces that this isn’t just a handful of giants dragging the market higher anymore. It’s broader participation — something we’ve been waiting months to see.

The Crossroads Ahead

But there’s a catch…

We’re entering a vulnerable period. Earnings are mostly behind us, volume in mega caps and chips is light, and the market needs a legitimate push now that Thursday’s numbers are locked in. If we don’t get that move, the indexes are exposed.

I also don’t like what I’m seeing in the Financial Sector (XLF). It moved higher but still couldn’t hit new highs. The market can’t sustain a bullish leg if financials lag. The same rule applies to tech — chips must lead or tech won’t follow.

And let me be clear: I don’t like the bond market at all right now. Weakness there makes the entire structure more fragile because it affects everything from rate expectations to sector flows.

SPY has some volume behind it, but it still can’t break through resistance because technology is holding it back. That divergence creates a setup that demands caution even with the promising signals coming from small caps.

The takeaway is simple…

We may be watching the early stages of healthy rotation, or we may be watching leadership fail at the exact wrong time. Today’s session will tell us a lot about which path we’re on.

I hope that helps!

Roger Scott
Roger Scott Trading

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