Nine of the 11 market sectors finished higher last week.
But it was the other two that dragged the market down…
For the second week running, communications and technology stocks took a beating. The State Street Communications Select Sector SPDR ETF (XLC) dropped 5.3%, and the State Street Technology Select Sector SPDR ETF (XLK) fell 2%.
That was enough to pull the S&P 500 Index into the red, even with every other sector in the green.
I’ve said this all year, and I’ll repeat it again today: As goes the tech sector, so goes the S&P 500.
Together, tech and communication services make up about half of the index. When those two sectors stall, it’s nearly impossible for the S&P 500 to move higher. That’s a real problem for the average investor who has most of their life savings parked in an index fund.
For us, it’s an opportunity.
All year, my Green Zone Power Ratings system has been alerting us to opportunities outside the tech and communications sector, particularly in the energy sector.
And I fully expect it to keep finding quality opportunities, no matter which way the broader market heads. So, what is the system telling us to do today?
Let’s take a look.
Bullish on Health Care
The top-performing sector last week was health care. The State Street Health Care Select Sector SPDR ETF (XLV) was up a strong 3.1%.
Health care tends to be a defensive sector, as medical spending is not strongly impacted by the economy’s ebb and flow.
Of course, it’s not really our style to “rotate into defensive sectors.” In Green Zone Fortunes, I look for healthy and growing stocks that I can confidently hold for multiple years.
So, let’s see if any of the top-performing health stocks from last week make the grade.
As I do every week, I ran my customary screen of the biggest movers in the sector that were still within 10% of their 52-week highs. The idea is to look for solid, market-leading stocks that are getting stronger.
Here’s what I came up with:
There’s a lot of green here. Seven out of nine rate as “Bullish” on my Green Zone Power Ratings, and all are close to their 52-week highs.
Health care and biotech stocks can be tricky to invest in. So much depends on drug approvals and patent protection. That can make revenue lumpy and prone to sudden swings.
But one health care stock stands out for its stability.
I’m talking about Quest Diagnostics (DGX).
Quest runs medical labs. When your doctor orders a blood test, a urine test or a swab, there’s a good chance the sample ends up at Quest. The company tests it and sends the results back to your doctor.
Most of what it does is basic “maintenance” screening: cholesterol, blood sugar, thyroid levels, etc. But Quest also does more complex work like cancer or genetic screening and also does workplace drug testing.
Now, AI may unleash a wave of new drugs and treatments. It’s not hyperbole to say AI could turn the medical establishment upside down.
But lab work? That’s about as AI-proof as it gets.
Before your doctor can prescribe a custom, AI-designed treatment, they have to diagnose you. And that starts with a blood or urine sample.
Quest rates “Bullish” overall on my Green Zone Power Ratings system. And it scores a “Strong Bullish” 94 on Volatility and 84 on Quality.
The point is, this is a business people need in good times and bad. And AI makes it more important, not less. It’s no wonder the stock has trended higher all year.
What About Communications?
Last week, I wrote…
The past few weeks have been brutal for virtually every company scaling up on AI infrastructure.
Wall Street is concerned that the massive amount of debt being taken on to fuel the AI infrastructure boom simply isn’t sustainable. Or worse, they worry that for all of AI’s world-changing potential, the profits for the companies actually building out the infrastructure aren’t going to materialize.
A week later, those concerns are still front and center. Google parent Alphabet (GOOGL) lost about half a trillion dollars in market value last week due to Wall Street angst over its capital spending and the financial commitments it was making.
But could last week’s drubbing have been an overreaction?
Let’s see what my system says.
I ran my customary screen of the sector’s biggest losers for the week that are still trading within 10% of their 52-week lows. The idea is to find beaten-down gems that look poised to recover.
I relaxed that criteria for one important reason: I wanted to show the contrast between “techy” communications stocks and distinctly “old school” media.
Let’s dig into it.
The biggest loser last week was Reddit (RDDT), which runs online forums where users join topic-based discussion groups.
Its shares plunged 36%.
Why?
AI is eating into its business.
Reddit depends heavily on traffic from Google searches. But more and more, Google users get an AI-generated summary at the top of the page… and fewer of them click through to Reddit.
It’s unclear what Reddit can do about it… and how big the threat really is. Ironically, the same worry drove much of Alphabet’s sell-off. Google is effectively cannibalizing its own search business with AI.
For what it’s worth, my system says don’t buy this dip. Reddit’s shares rate as “Bearish.”
Meanwhile, the only two “Bullish” stocks on the list are as old school and non-techy as it gets: Wall Street Journal parent News Corp (NWSA) and Fox News and Fox Sports parent Fox Corp (FOXA).
Both rate “Bullish” or better on volatility and quality. And surprisingly, for legacy media companies, both also rate “Bullish” on growth.
To good profits,
Adam O’Dell
Editor, What My System Says Today
