Traders on floor of the New York Stock Exchange.Source: New York Stock ExchangeFor years, skeptics of index investing who watched trillions pour into S&P 500 funds argued that it would probably take a prolonged bear market to undercut the dominance of the standard passive approach.Yet in recent months, an exuberant bull market is working to sideline the S&P 500 as the gauge of the market’s energy and dampen the public’s zeal for simply owning the prevailing benchmark.The past few months, the most dramatic action has happened beyond the reach of the S&P 500. The Russell 2000 small-cap index has been on a blistering and widely observed run, in a grab for the most cyclical, highest-velocity stocks in anticipation of economic acceleration. The Russell is more overbought than it’s ever been relative to its intermediate-term trend.But it’s not just small caps. The S&P Completion Index includes all listed U.S. stocks except for those in the S&P 500 – a few thousand tickers reflecting companies of all sizes. This index has vaulted ahead of the S&P 500, thanks both to small-caps and to the surge in value in so many younger, trendy, high-growth but still-unprofitable stocks.Think Square, Uber, Snowflake, Airbnb and dozens more, which either don’t yet qualify for the S&P 500 or haven’t been around long enough to get a look. And let’s not forget, the S&P 500 funds became buyers of Tesla as a 2% position after the stock had gained 700% in a year.Ranging even more widely, speculators have been feasting on penny stocks, those that trade over the counter rather than on a formal exchange. Here’s the OTC Markets Composite Index relative to the S&P 500 since October. Some of this is Bitcoin trusts, some large international companies, but most are insubstantial but fast-moving longshot bets.And the crop of companies outside the S&P 500 is burgeoning with initial public offerings running at a frenzied pace. For most of the market advance that started in 2009, bullish strategists cited the historic decline in the number of public companies as somehow creating scarcity of equity assets (even as total market cap matters more).Well, this has reversed. Adding to this Sept. 30 total the more than 200 new listings since then (including more than 50 special purpose acquisition vehicles in the past two weeks), the number of listed U.S. companies is back near a 20-year high.As ever, investor flows follow performance and pizazz. The ETFs garnering the heaviest flows since Oct. 30 – when the recent rally got rolling – include Vanguard Total Market fund (which captures more of the non-S&P 500 names) and a group of cyclical proxies.The poster child for the market’s fixation on the “disruptive technology” theme is ARK Innovation (ARKK), which has nearly matched the S&P 500 SPDR (SPY) despite holding only 6% as much in assets.And the main font of animal spirits during the stunning rally off the March 2020 low has been individual investors, many of them novices, who saw the massive market dislocation as a chance to grab for targeted recovery plays rather than leg into broad equity exposure via indexes.As has been well chronicled, 10 million new online brokerage accounts were opened last year, shortly after the industry went commission-free, and in fact the biggest surge in activity has been in call options. Not only individual-stock risk, but leveraged plays on individual stocks that can expire worthless within weeks.This action is intriguing given the conventional wisdom of several years ago, around the advent of “roboadvisor” automated investment services such as Betterment and Wealthfront. The backers of these firms contended, with good evidence, that younger investors intuitively grasped the wisdom of not trying to beat the market, preferring a disciplined, low-cost software-driven approach using index ETFs.Not that long-term diversified investing and opportunistic trading are in total opposition. Fidelity Investments – already a huge buy-and-hold mutual-fund leader – started Fidelity Brokerage in the 1970s as soon as discounted commissions were permitted, and the businesses coexist fine, sometimes serving the same clients. Many younger people getting involved through trading will at some point see the need for a more structured, tax-aware plan.There’s a way in which the S&P 500 is simply reflecting the momentary, cyclical preferences of investors. It had become a growth-dominated index through the persistent outperformance of tech and secular-growth stocks in a disinflationary, slow-growth, winner-take-most economy. By some measures, only about a quarter of the index components were clearly economically sensitive.The talk last summer was all about how acutely concentrated the S&P had become in the top five stocks. That has now run in reverse.Anastasios Avgeriou, chief equity strategist at BCA Research, plots the relative performance of the five largest stocks against the other 495 against the 10-year Treasury yield (with yields inverted). It shows that as yields have climbed with expectations for brisker growth and higher inflation, the top five have ceded ground to the field.In this way, the relative underperformance of the S&P 500 and its neglect by thrill-seeking investors could simply be another marker of Wall Street sentiment at the moment: Fully fixated on a post-vaccine unleashing of the economy, grabbing for the stocks most leveraged to it and in full chase of the adrenaline-infused “story stocks” that offer the chance for overnight bragging rights. In the process, the FAANG-type growth names at the top of the index have come to look rather modestly valued and less crowded versus the rest of the market.A week ago, I suggested the market was nearing a point where it would either cool of or overheat. In a way it spent the week doing both – the broad tape cooling benignly while the racy stuff runs glowing-hot.Thus far the dowdy-seeming S&P itself has shown more fatigue than stress — though everyone knows how the first can lead to the latter if the kids refuse to settle down and be quiet.