AI Trade Under Pressure in Big Tech as Rotation Lifts Healthcare, Materials and AI-Linked Niches

Mary Ellen McGonagle opens by saying the week was topsy-turvy and that the show will review what drove the markets and what to watch as earnings season continues. The first item she highlights is Anthropic's release of its S-1 filing on Monday, which laid out the company's numbers on AI spending and its earnings outlook, along with its intention to go public.

She says the news was well received and that AI-related stocks rallied early in the week. That rally was brought to a halt as earnings season arrived, particularly among the Magnificent Seven stocks.

Alphabet came out with numbers showing very high earnings, following Meta Platforms' results the week before. McGonagle says the market did not like either report, and AI-related stocks dropped very sharply as a result.

She notes that management comments in those earnings reports were consistent with the AI theme she will discuss later, and she says she will return to both the bad news and the newer areas benefiting from AI.

McGonagle reviews the S&P 500 daily chart. The index was down a little more than 0.5% for the week, though it felt more damaging because of an almost 2% drop on Friday. Technically, the index closed below the 100-day simple moving average, which she describes as a near-term key area of support. The next possible support is the low hit at the end of September, and she says the index is just closing at that level.

She adds that the RSI and MACD are both negative and the index is below the 50-day simple moving average, which she takes as confirmation of a downtrend. She says she will review further support levels in her twice-weekly MEM Edge report.

The Nasdaq fell 2% for the week and was not able to regain the uptrend it had at the start of the week during the AI-related rally. It closed just at the 50-day simple moving average and below its other key averages. McGonagle identifies the 200-day moving average as very critical going forward.

With RSI and MACD still negative, she concludes that the Nasdaq is also in a downtrend.

In contrast to the cap-weighted indexes, the equal-weighted S&P 500 was up almost 1%. McGonagle says that matters more because of the last six weeks of rotation away from fast-moving tech names into other areas. The index is sitting above its key moving averages with a positive RSI and MACD.

She interprets this as showing more robust bullishness in the broader market compared with the heavyweight tech names. She then turns to the 11 underlying S&P 500 sectors, sorted by RSI on a two-month daily chart.

Healthcare, represented by XLV, is the first sector she highlights, with high-volume characteristics as the sector hits a new high. On a monthly chart she says the sector is up almost 10% for October. She says basic materials, which she has been highlighting because of relative strength, are also benefiting from earnings, citing steel, aluminum, stocks and packaging companies that report strong results.

Energy slipped a bit but was still up 1% for the week, which she calls respectable. She says the sector remains in a confirmed uptrend, and she will look at the oil price and its impact later in the show.

McGonagle moves to utilities (XLU), which show a sharp recovery through October and are rising on strong earnings, particularly among electricity-related companies. She describes this as one of the somewhat newer areas in AI that are benefiting. Staples (XLP) had a multimonth base breakout in mid-October and continue to advance. Among REITs (XLR), she says some data-center-related names are performing well, and high yields make the group attractive as a defensive play.

Industrials (XLI) rose almost 2%, with some AI-related infrastructure names posting good numbers, but she says most names remain down and the sector is below its downward-trending 50-day average. Communication services (XLC) has fallen sharply, with Alphabet dropping 12.5% last week and Meta down 4.3% this week.

McGonagle highlights IBB, the biotech ETF, which was up almost 5% for the week on high volume on the upside days. She says the companies lifting the group came out with both earnings and announcements that, in her view, confirm AI is helping advance the discovery of new treatments and drugs. She then notes that XRT, which tracks larger retailers viewed as defensive, rose about 1.2%, and that small caps had a nice gain for the week.

Volatility spiked as high as 24 during the day, but settled at about 18. McGonagle says this is still somewhat elevated but well below the peak, so the initial shock subsided. Brent crude pulled back from 117 but remained elevated near 112 after diplomatic moves were made. She says that the exploration and production energy companies respond most directly to the oil price.

The regional banking ETF, KRE, fell for the week and tried but failed to reverse its downtrend. McGonagle attributes this to elevated interest rates and other factors. The expanded software ETF, IGV, took a real tumble after a couple of major earnings reports, with a negative RSI and MACD crossover and a price below the 50-day average. ServiceNow pulled back dramatically after earnings and is below its 200-day average, which she ties to enterprise software and AI. Palantir is due to report next week.

The semiconductor group was down less than 1.5% for the week, but fell 8.2% on Friday, pushing it back below its 200-day simple moving average. McGonagle says the RSI did not get into positive territory and the MACD is now negative. She then describes newer AI beneficiaries, starting with housing stocks.

Cavco (CVCO), a company with a market value of about $4.2 billion, reported numbers on Thursday and announced that it is providing data center workforce housing, with a backlog of $500 million in addition to current buildouts. McGonagle says the stock gapped up into a base breakout. Legacy Housing, a roughly $700 million company focused on Texas and the South, is benefiting from housing built for data-center workers. Champion Homes (SKY), which works with modular housing, also advanced.

She cautions that these charts are not entirely bullish. She says the stocks are advancing on AI-driven growth, and that the broader point is that these areas are coming into play because of earnings-driven growth linked to AI activity. Dominion (D) reported good numbers, centered on electricity demand from data centers, and has a positive RSI and MACD and a yield of about 4%. She says several electric and multi-utilities are also fairing well.

Patrick Industries (PATK), a company with a market value of about $2.4 billion, supplies raw materials for the manufactured housing area, which is seeing growth. McGonagle lists it among the infrastructure-related industrial names she described earlier as posting good numbers.

McGonagle shows a weekly chart of the semiconductor group (SOXX). She says the weekly RSI has entered negative territory, and the group closed just below its 40-week, or 200-day, simple moving average. The MACD is not yet negative but is heading south. She then turns to Qualcomm's chart from the first quarter of 2000, the top when Qualcomm reached a very high level. With Bollinger bands overlaid, she says viewers should watch for similar deterioration in stocks that have had parabolic moves.

TG Therapeutics (TGTX) advanced this week on analyst upgrades ahead of its early-next-week earnings report, and the company had positive phase one results for its MS therapy. McGonagle notes that viewers can check earnings dates in StockCharts settings. She also mentions Krystal Biotech, whose estimates were revised ahead of earnings. Most of these stocks are seeing advances because AI speeds discovery and product development.

The Russell 2000 (IWM) had a good advance before a 1.7% pullback on Friday, and it is still meeting upside resistance at its 50-day simple moving average. Its RSI is negative, but small caps rallied 1.3% for the week. McGonagle highlights several names. Urban Outfitters hit a new high after a 12-month base breakout on heavy volume, with growth in its apparel rental unit. Brinker (EAT) gapped up after earnings and has a positive RSI and MACD. Abercrombie & Fitch reached a new high ahead of earnings in several weeks. Cracker Barrel is near a short-term high, and American Eagle moved back above its 200-day average. She says there is vibrancy beneath the surface of the small-cap index.

GoDaddy (GDY) was up about 11% on the day, with an AI product driving sales. McGonagle says the stock is only in the early stages of a downtrend reversal after 18 months of declines, with high volume on the buy days on the weekly chart. She also covers Cboe Global Markets, which benefited from new derivatives activity, and says the company reported earnings that day. Another company she cites posted a 36% revenue increase and strong portfolio growth, mostly AI-related. Tyler Technologies, a public-sector software company, reported large growth in its AI-infused software deals. She also mentions a basic materials company that reported results and is in a base breakout.

McGonagle reviews the Magnificent Seven stocks, which she says were a big part of the Nasdaq's deterioration. Tesla fared best, up 7% and 12% over the past week, helped by a potential merger with SpaceX and bullish inventory news. Apple is viewed as a safer, somewhat defensive play because it is less tied to AI and does not have huge capital spending, and it sits at a new high.

Microsoft announced AI spending, but its cloud computing growth helped it avoid some of the broader weakness. Alphabet fell 12.5% after its free cash flow numbers came in very light, which she says fuels fears about the funds needed to pay for AI developments. The stock is in a confirmed downtrend. Nvidia held up relatively well compared with other semiconductor stocks and recovered from closing below its 200-day average, but it has a negative RSI and MACD, and she says the group is not constructive.