The AI trade is at a critical juncture, with a recent bounce in growth stocks raising questions about a potential turning point after a rotation into value sectors. Analysts are closely watching key charts, including the relative strength of semiconductor ETFs against broader market indices and the technicals of the Nasdaq-100, which show a double top and a broken uptrend line.
The current analysis suggests that resistance levels are likely to hold for tech, indicating a potential continuation of the trend favoring value-oriented sectors. Investors are advised to monitor these technical indicators for further clues on market direction. 
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The market is at a pivotal moment, especially concerning the artificial intelligence (AI) trade. For months, we've observed a shift from growth stocks, particularly in technology, towards value-oriented sectors. This trend prompted adjustments in our portfolio, including a 13.5% reduction in our AI-related holdings and an increase in energy and healthcare. We also implemented a modest 5% hedge against the Nasdaq using the PSQ ETF.
However, the recent strong earnings from SpaceX on Tuesday sent a jolt through the market, with growth stocks making a comeback. This raises a critical question for active portfolio managers: Was this resurgence a mere bounce, or does it signal a genuine turning point away from the rotation into value?
Analyzing the Charts
To answer this, we're examining two key charts:
1. Relative Strength: Semis vs. Benchmarks
The first chart analyzes the ratio of the VanEck Semiconductor ETF (SMH) against both the S&P 500 (SPY) and the Nasdaq-100 (QQQ) over the past year. A ratio chart is an invaluable tool for gauging relative strength. Unlike a simple price chart, it shows whether one asset has outperformed another. When the line on this chart rises, it means the first asset (semis, in this case) is performing better than the second.
The data reveals that both SMH/SPY and SMH/QQQ ratios peaked around June 1st. Despite the ongoing build-out of AI infrastructure, semiconductors have underperformed both major benchmarks since that peak. Crucially, both these ratios are now resting on support levels. A breach below these highlighted zones would confirm the continuation of the rotation out of semis and signal a risk-off sentiment favoring value sectors.
2. Nasdaq-100 Technicals
The second chart provides a traditional daily view of the Nasdaq-100. This index has formed a double top between its June and September highs. Furthermore, it has broken below its uptrend line (dashed red) and key moving averages (21- and 50-day). The recent SpaceX-driven rally has pushed the Nasdaq-100 back up from below its previous support level. This broken support may now act as resistance, likely around the 30,000 mark.
Investment Strategy and Outlook
Given our current portfolio positioning, our analysis suggests that this resistance level for the Nasdaq-100 is likely to hold. If our assessment proves incorrect and the Nasdaq-100 breaks through this resistance, we are prepared to lift our hedge and reallocate the 13.5% trimmed from our AI holdings, potentially at higher prices. This is the inherent trade-off in active management, especially during uncertain market junctures. We will continue to monitor these technicals closely to navigate the evolving market landscape.
(See the video above for Todd's complete chart breakdown.)
