The Winners of the Week: Physical Economy & Defense

The indecisive price action observed at the close of last week anticipated the recent decline in the major U.S. indices. However, as mentioned in my previous publications, the gap fill for the $S&P 500(.SPX)$ and $NASDAQ 100(NDX)$ is the best outcome that could happen for bullish continuation.

The first trading week of 2026 presented a significant rotation, since investors reduced exposure to 2025’s growth darlings; specifically Technology and Consumer Discretionary, and reallocated capital into defensive, physical assets like Energy and Utilities.

In recent weeks, I highlighted the bearish setups for both $Tesla Motors(TSLA)$ and $Apple(AAPL)$ The former proved to be the major loser among the Magnificent Seven. The individual analysis for each of these securities (and other major ones) including technical charts and price levels is presented every weekend in this publication as detailed below, for now let’s assess sectors and the high probability setups posted last weekend:

The Winners of the Week: Physical Economy & Defense

Energy $Energy Select Sector SPDR Fund(XLE)$ | +2.88% The energy sector emerged as the week’s standout performer. Two key catalysts drove this rally:

Geopolitics & Supply: Heightened tensions in the Red Sea combined with OPEC+ extending production cuts into Q1 2026 provided strong support for crude prices.
The “AI Power” Trade: A compelling new narrative is getting traction based on traditional energy as a critical enabler of the AI boom. Investors are betting that renewables alone cannot meet the massive power requirements of next-gen data centers, effectively repricing oil and gas majors as infrastructure plays.

Utilities $Utilities Select Sector SPDR Fund(XLU)$ | +0.86% Utilities found a bid as investors sought defensive positioning amidst early-year uncertainty. Much like Energy, this sector is benefiting from the “AI power demand” thesis. Electricity providers are increasingly viewed as essential infrastructure required to sustain the technology sector’s expansion, transforming a traditional “boring” sector into a growth-adjacent play.

Materials $Materials Select Sector SPDR Fund(XLB)$ +0.61% & Industrials $Industrial Select Sector SPDR Fund(XLI)$ +0.30% These sectors posted modest gains, underscoring the broader rotation toward “real economy” assets. As capital fled purely digital growth stocks, it found a home in the tangible industries that underpin manufacturing and production.

The Losers: Profit-Taking & Consumer Jitters

Consumer Discretionary $Consumer Discretionary Select Sector SPDR Fund(XLY)$ | -3.46% The steepest declines were felt in Consumer Discretionary, driven by renewed anxieties over the health of the consumer.

Spending Fatigue: Reports of lackluster holiday demand weighed heavily on sentiment.
The Tesla Effect: Sector heavyweights dragged the index lower, most notably Tesla, which slid after reporting a decline in annual sales for the second consecutive year.
Locking in Gains: After a stellar run in 2025, investors used the new tax year as an opportunity to book profits.

Technology $Technology Select Sector SPDR Fund(XLK)$ | -1.37% The leader of 2025 faced a wave of profit-taking to start the year. While the long-term thesis remains bullish for A.I., the short-term focus shifted to risk management.

Financials $Financial Select Sector SPDR Fund(XLF)$ -1.44% Financials lagged as general market caution and falling yields, which typically compress bank margins.

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The Winners of the Week: Physical Economy & Defense