AI Money Shifts to New Tech Leaders

Mary Ellen McGonagle observed a significant change in the technology sector, with market breadth showing deterioration beneath the surface.

Despite this broader market indecision, a focus remains on select sectors exhibiting explosive growth.

September's employment data, which showed a rise in unemployment, was viewed positively by the market as it eased pressure for interest rate hikes.

PCE inflation data also came in lower than expected, providing a solid foundation for market sentiment, despite the NASDAQ pulling back slightly after reaching a new high.

Micron's recent earnings report acted as a significant catalyst, reshaping the landscape for AI buildout and demonstrating resilience for the NASDAQ.

This positive market reaction has shifted the investment focus from general big tech toward specific companies that are direct beneficiaries of AI investment.

The S&P 500 advanced by 0.7%, allowing it to regain ground above its shorter-term moving averages, including the 50-day simple moving average.

RSI and MACD indicators have returned to positive territory, suggesting market moves are currently driven by specific sector strength rather than broad growth.

The equal-weighted S&P 500, which minimizes the influence of the 'M7' mega-cap names, is in the initial stages of stabilization.

However, the index has not yet entered a confirmed uptrend, and current data indicates that market expansion has not yet broadened significantly beyond the leading big tech companies.

The market continues to show a divergence, with leadership concentrated in a few key areas rather than a widespread advance.

Analysis using a two-month daily price chart identified technology as the clear market leader among the 11 S&P 500 sectors, showing a gap up in the XLK chart.

The MACD indicators for technology suggest that the current advance remains in its early stages, with ongoing efforts to pinpoint areas of both outperformance and continued weakness.

The exploration and production segment helped energy rise 1.3% for the week as it tested its 21-day simple moving average.

Utilities are experiencing a modest rally, though these gains are concentrated in AI-related data center energy providers, while high interest rates above 5% continue to suppress demand for traditional high-yield sectors like staples, financials, and REITs.

The Industrials sector performed roughly in line with the S&P 500, with the MACD showing a bullish crossover late last month.

While not yet exhibiting explosive upside momentum, the RSI for Industrials is trending upward, and specific companies within the sector are beginning to attract investor interest.

Semiconductors recently surged nearly 3%, with a significant portion of that gain occurring in a single day, cementing their role as a core focus due to consistent bullish trajectories.

The software sector (IGV) is nearing a potential breakout to new highs, despite its momentum largely remaining sideways.

Software remains a primary area for identifying leadership stocks due to its critical role in AI advancements.

The 10-year Treasury yield recently hit a 24-year high, reaching approximately 5.3%, indicating elevated interest rates.

Despite these higher rates, growth areas in technology remain resilient, primarily due to strong earnings and positive outlooks that allow them to absorb the higher rate environment.

Brent crude oil closed above the 100 level, an important threshold for energy stocks and interest rate considerations.

Market volatility, measured by the VIX, dropped to approximately 15, signaling a lack of immediate concern, while the Russell 2000 (small caps) shows a potential reversal at its 200-day simple moving average, supported by a bullish MACD crossover and positive RSI.

The financials sector declined by 2.5% last week, facing significant headwinds from the current interest rate environment and Federal Reserve bond-buying activities.

Anticipated reductions in consumer spending and borrowing due to higher interest rates further pressure the sector.

Agenic AI, defined as AI that can execute commands independently without prompts, is now driving investment, with immediate beneficiaries (0-3 months) including Dell, HPE, and AMD.

Future beneficiaries are expected to include automated testing and packaging companies like Teradyne and TMS, as the technology matures.

Optical networking stocks, particularly Ciena (CIEN), are seeing renewed institutional interest, a continuation of previous discussions on the sector.

Bernstein's upgrade of Ciena underscores the sector's crucial role in managing the massive data streams required by AI, with Applied Materials and other auxiliary technology firms also gaining momentum as essential data center infrastructure providers.

Sterling Infrastructure (STRL), MasTec (MTZ), and Quanta Services (PWR) are attracting capital to meet AI-driven demand for physical infrastructure. Investors should monitor StockCharts.com for earnings reports and technical breakouts, as this is the next area seeing money flows due to advances taking place, according to market analysis.

Investors are encouraged to monitor earnings reports and technical breakouts for these industrial firms, as they represent the next area of money flow driven by technological advancements.

The broader healthcare sector (XLV) has faltered, with large pharmaceutical companies like Johnson & Johnson facing negative news, and the biotech ETF (IBB) pulling back to its 50-day moving average.

Despite this, specific AI-related healthcare firms, such as Twist Bioscience (TWST) and CareDx (CDNA), remain vibrant by effectively leveraging AI for genomics and other healthcare applications.

These companies illustrate that vibrancy within healthcare is increasingly tied to the successful utilization of AI, showcasing a dichotomy between traditional and AI-driven segments.