The ARTAIS AI Model Update
The AI theme continues to rotate in a manner similar to that of the broader market. Relative strength and momentum vs the S&P 500 index is weakening in the higher-beta areas of the theme, while lower-volatility areas like utilities are improving:
This rotation is also showing that we are trading at important levels that can give us better insight into how investors are feeling about risk as we approach three potentially market-moving catalysts:
Tech earnings. Starting next week, major tech companies begin reporting earnings. Investors will be watching this space closely to see if growth in the AI space is continuing to improve at a rapid pace.
The Federal Open Market Committee (FOMC) meets October 27-28. US Treasury bond yields have been rising, in part due to inflation fears and worries that the Fed is making a policy mistake by not raising rates.
Currently, there is a 31% chance that the Fed raises rates. But the odds have been changing rapidly with every new piece of inflation or economic data.
A month ago, there was a 43.5% chance that the Fed would raise rates. Then last week, those odds dropped to 17%. There is a chance the market may be surprised at what the Fed actually does during the FOMC meeting.
The midterm elections. As I have discussed numerous times, the fourth quarter of a midterm year and the year that follows have historically been a very good time to own equities.
This means that “if investors believe we will see a similar trend play out this election, we should be seeing stocks, especially high-beta stocks, rising.
But this hasn’t been the case. Investors may be waiting for a clearer picture from these three catalysts, which is why I think we are nearing a decision point.
Oversold vs Overbought
Utilities have been showing rising momentum and relative strength this month. The sector is now short-term overbought and unable to break above resistance.
Virtus Reaves Utilities ETF (UTES)
The top three holdings - Constellation Energy, Talen Energy, and Vistra - make up over a third of the ETF’s portfolio.
All three companies are painting a similar picture: short-term overbought and unable to break above key resistance levels.
Constellation Energy (CEG):
Talen Energy (TLN):
Vistra Corp (VST):
The memory subsector, the weakest area in the group’s relative rotation, shows a similar but opposite setup.
These names are short-term oversold and approaching support levels:
Roundhill Memory ETF (DRAM):
Micron (MU):
My argument has been that the rotation in the market has been just that: rotation.
So far…
My worry is that the bond market continues to panic, causing yields to rise, combined with a larger and longer-lasting spike in oil prices.
If this occurs, it may be enough to scare investors away from the normal rotation of the market (meaning investors stop buying oversold stocks that are sitting at key support levels).
How the ARTAIS AI Model Is Handling This Risk
The goal of the model is to participate in the AI growth theme while managing risk.
To do this, I look to the bond market. Bond investors are typically unemotional and logical.
(I often use Captain Kirk and Mr. Spock from Star Trek as a …
For paid subscribers:
Exactly where the ARTAIS AI model is allocated right now
The high-yield spread level that has preceded past equity selloffs
The two signals I’m waiting for before the model buys AI stocks again
Today’s ARTAIS AI Screen results, updated every trading day