AI may eventually put all of us out of work…
But that’s certainly not the case today.
Sure, the September employment report was underwhelming, showing only 29,000 new jobs created.
But the unemployment rate held firm at 4.2%, a level roughly in line with the theoretical “full employment” rate.
So, while we’ve seen some high-profile cases of technology companies replacing workers with AI bots, that’s not happening across the broader economy.
If anything, the AI boom is contributing to a worker shortage.
There will always be some people between jobs, of course, which is why economists believe the unemployment rate can’t realistically stay below 4% to 5% without spurring inflation.
Of course, we do have inflation today… which is driving the ongoing rout of the bond market. And the damage to the bond market is also spilling over to the stock market.
Eight out of 11 of the S&P 500 Index’s industrial sectors finished last week in the red, and the S&P 500 itself finished down 0.2%.
But the news wasn’t all bad.
The tech trade is still alive and well, and the State Street Technology Select SPDR ETF (XLK) finished up a solid 1.8%. Energy also continued to trend higher, with the State Street Energy Select SPDR ETF (XLE) up 1.3%.
Even the utilities sector, which has taken an absolute beating over the past month due to its sensitivity to bond yields, managed to eke out a small gain. The State Street Utilities Select SPDR ETF (XLU) was up a modest 0.8%.
Mr. Market has a lot to digest right now.
The AI trade looks a little stretched, and the relentless rise in bond yields may end up being the proverbial straw that breaks the camel’s back. But for now, investors are continuing to pile into tech stocks.
Should we follow them?
Let’s see what my system has to say.
Tread Carefully in Tech
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:
Several tech names screamed higher last week. Lumentum Holdings (LITE) and Synopsys (SNPS) were both up more than 15%.
But my system is definitely recommending caution here. Of the nine tech stocks that jumped the highest last week, only one – Hewlett Packard Enterprise (HPE) – rates as “Bullish” on my system.
Another three rated as “Neutral,” implying they are priced to roughly track the broad market’s return.
More than half rated as “Bearish.”
Any or all of these stocks may continue to rip higher, at least for a while. But my system is telling us that we have better opportunities elsewhere.
Buying the Dip in Health Care
Health care has had a good run of late. Along with tech and energy, it’s the only sector in positive territory over the past three months.
So, could last week’s drubbing have given us a good opportunity to buy the dip in a sector that is trending higher?
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.
Unfortunately, after the strong run we’ve seen in the sector, there aren’t too many hovering close to their 52-week lows, so I relaxed that rule. Here’s what I found:
Interestingly, the biggest losers from last week are split down the middle. Just over half rate as “Bullish,” and just under half rate as “Bearish.”
At the top of the list is Incyte Corp (INCY), which specializes in treatments for blood cancers and autoimmune disorders.
Incyte rates as “Strong Bullish” on its Green Zone Power Rating and rates a perfect 100 on its quality and growth factors. The company is rated “Bullish” or “Strong Bullish” on every factor except size.
Biotech stocks like Incyte are often volatile.
If you’re looking for something a little more conservative, Johnson & Johnson (JNJ) is about as staid and defensive as you can get.
It rates a near-perfect 99 on its volatility factor and a “Strong Bullish” 90 on quality.
To good profits,
Adam O’Dell
Editor, What My System Says Today
