Momentum continues to look weak for most of the AI-themed sectors I watch. Of the main subsectors within AI, momentum has been strongest in areas that deal with “Defense Tech” (adoption and utilization of defense technology), infrastructure, and energy infrastructure.
However, these three areas are still trading below the Ichimoku cloud, which tends to act as support/resistance. This means we are seeing short-term momentum improve, but it is within the longer-term downtrend.
Global X Defense Tech (SHLD):
Global X US Infrastructure Development (PAVE):
Global X MLP & Energy Infrastructure (MLPX):
The areas that are trading above the cloud are seeing momentum decline (one of the rules in the model is that price needs to be above the cloud with positive momentum):
iShares Expanded Tech-Software (IGV):
First Trust NASDAQ Cybersecurity (CIBR):
Global X Artificial Intelligence & Technology (AIQ):
AI Rotation
For much of the AI-themed universe that I follow, momentum and relative strength vs. the S&P500 has been weakening during the month of October:
Rising yields, concerns over inflation, and worries about AI revenue growth have negatively impacted most of the AI themes.
The majority of the subsectors are in the lower-left quadrant. This is where momentum and relative strength are the weakest.
It is also where things tend to bottom out (buy low, sell high) as most, if not all, of the bad news has been priced in.
For market participants to look for opportunities in these oversold areas, there typically needs to be a catalyst to drive investors back into the theme.
I have been writing about three catalysts I am watching. You can read more about them in last week’s note:
As we get answers on these three catalysts, watch the rotation to see if the market feels the issues facing the economy (such as inflation) are, or are not, being properly addressed.
Why the Model Is “Risk Off”
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The credit-market signal that moved the AI model out of equities and what it is saying now.
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The conditions that would put it back into AI stocks
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