Stocks Sell Off on AI Whack-a-Mole

Jeff Buchbinder (00:00):

<Silence> Hello everyone and welcome to LPL Market Signals. Jeff Buchbinder here with my friend and colleague, Adam Turnquist. Adam, we hope you enjoyed the long weekend. I guess you got some unseasonably warm weather.

Adam Turnquist (00:15):

Yeah, we had a little bit of sun here in northern Wisconsin. We were up at our lake, out on the lake, actually. There was, I think, 26 inches of ice. I was walking around in a long sleeve shirt, low fifties. A little weird when there's 10, 15 trucks out there driving around, and you're standing on a lake in basically a t-shirt, <laugh> on the weekend. But really nice weather here in the Midwest. But unfortunately, no more snow now. It's all melted. So the sleds are put away for a little while.

Jeff Buchbinder (00:43):

No, yeah, I guess that's a downside. Surprising that Wisconsin would be so much warmer than Boston because we've mostly been in the thirties. It's Tuesday, February 17, 2026 as we are recording this. So, of course, a little bit late this week. But hopefully this will be available by the end of the day, Tuesday for you. Of course we're going to talk AI, AI and more AI this week, because that's really the biggest story for the markets. But I was just scanning headlines this morning, and I'd say half the headlines had AI in them <laugh> from a market perspective, you don't have AI in the, you know, Iran headlines or China, Taiwan headlines or things like that, of course. But you do have AI affecting essentially all the big moves in stocks. So that's really our main theme for today.

Jeff Buchbinder (01:39):

So here you see the agenda. We'll talk about this AI disruption that's hit a number of industries. The you know, the concern has really shifted, right? We started with concerns about a bubble and too much spending, and now we've got concerns about the adopters potentially destroying value and ruining business models. That's kind of the way I would sum that up. So we'll talk about that. Next chart check, of course, Adam, as you always do when you're on the pod with me you'll just run through some interesting charts for this week, and I think your theme is a good one because we have so much dispersion, right? Return of the stock pickers market, stocks are just moving in so many different directions and pretty big moves, and that creates opportunities certainly for active management. Then we'll close at the week ahead preview.

Jeff Buchbinder (02:33):

And we get the core PCE this week, which I think is really the only economic data point that has the potential to move markets. But that's not the only thing on the calendar. So, we'll give you a quick preview as we wrap up. So starting with the market recap, of course, you'll see in the sector performance that the trade really was to sell AI losers. So or potential AI losers, we should say. S&P 500 down 1.3% last week. The NASDAQ fared worse, of course. That's where a lot of the AI risk is in tech. So you saw tech down 2%. NASDAQ down similarly or communication services down three and a half. Of course, that's a lot of tech. Consumer discretionary down, a little over two, a lot of tech there. Now I guess the one that maybe stands out, Adam, is financials, right? There's not tech, a lot of tech in financials obviously, but that's one of the areas where the market's gotten the most worried about AI disrupting different business models. So I know we're going to get more into this, but just your high level thoughts on the week the in terms of where the weakness was and what the setup is here heading into this week.

Adam Turnquist (03:58):

Yeah, so certainly a risk off week. You can see that at the sector level, utilities up 7%. You typically don't see that unless the market's selling off. So some pretty big moves there, but it was just really a week about where the cross hairs are going to land. At what sub-industry group. We had these interesting reports from a company called they're a former karaoke machine maker, so I think it was their name was Algorhythm <laugh>. And they put out a white paper talking about how they created this AI model that can disrupt the transport business and basically make it more efficient. Companies don't need to rely on some of these transport services to move freight, that upended many of the transport companies, and they were down double digits. We've seen the same thing on the asset management side, or alternative asset management side, which contributed to some of the weakness in financials.

Adam Turnquist (04:49):

So every day you'd wake up what's the new AI model, whether that's from Open AI or any of the major platforms. And that's where the market would go and sell everything. But it was just an AI disruption trade. The VIX moving higher as well, not to alarming levels where you start to see panic when you look at the VIX futures curve. It hasn't moved hasn't inverted, we'll call it. So still watching that and just overall volume last week, pretty much above average throughout most of the week. And then, let's not forget about the big rotation as well, the equal weight S&P 500 closing or hitting record highs last week, outperforming, I think the cap weighted by close to 2%. So there's still some winners out there, but it's just as you highlighted this, it's much more dispersed in terms of overall returns and certainly with earnings as well. I think the one day initial post-earnings moves for the S&P so far are well above average, well above what the market expected for earnings season we're. So we're seeing it on at the earnings level as well.

Jeff Buchbinder (05:59):

Yeah, just some huge moves. I know people have talked about software being the most oversold ever, ever's a long time <laugh> and you know, some of these extreme moves on earnings like you mentioned, or around these AI field. I mean, these are some of the biggest moves that some of these stocks have seen in not just, you know, this year, last year we're talking about, you know, since, since the COVID moves. And those, of course, were massive in 2020. So yeah, that's the story. It's all about the AI and rotation. So I mean, I guess the other story last week, maybe big story, you know, the economic data, right? We got a really strong jobs report. And CPI was pretty good. At least the core was a little better than expected.

Jeff Buchbinder (06:50):

Up 2.5% year over year is not bad. So I think the you know, the bond market overall liked that, although I got to think some of this bond market rally was driven by other factors. So you have, you know, potentially economic growth concerns related to AI, right? I think that was a factor. And then you had strong, a strong long-term bond option, government bond option last week, I know. So maybe that put some downward pressure on yields. What are your thoughts Adam, on the bond market here?

Adam Turnquist (07:23):

I think the bond market may have been the bigger story. When you look at some of these moves, at least technically as we like to view things, the 10-year Treasury yield, for example, taking out support at 4.20, getting almost down to 4%. I think we did get an intraday move there. So that's a level we're watching for support. The front end of the curve, the two year, getting close to the October lows around 3.37. So some major support levels are getting tested in the bond market. And as you mentioned, that 30-year auction really helped calm some angst in the Treasury market. We had a weaker 10-year auction last week, but certainly the 30-year, which is always under a little bit more scrutiny, is there's questions about who wants to take that much duration risk. Well, those went pretty well answered when you look at the bid to cover ratios and the overall demand.

Adam Turnquist (08:12):

And within that data, you can look at indirect bidder participation, which is really a proxy for foreign investment. And that was at 69%, that was one of the higher readings we've seen in quite a while. So this idea that we're, the market is boycotting longer dated Treasuries, or the Treasury market in general, seems to be eased a little bit for now, especially with some of that demand. But the moves have been pretty pronounced. We'll see how the 10-year handles 4% outside of that fixed income market. I would just highlight the dollar holding above 96. It's been a level we've talked about for almost too long, and I'm arguably getting sick of talking about it. So we've had a bounce, it was oversold. Again, buyers came in right around that level. That traces back to this more secular uptrend and marks the low end of this shorter term range for the dollar, but still some key levels to get through before we talk about a upside breakout. Notably kind of the hundred mark on the dollar. So that would be the area of resistance to watch there.

Jeff Buchbinder (09:18):

Yeah, I got a little bit of upward pressure on the yen. Certainly Japanese market's been doing well and in this rotation. So that is certainly a market to watch. We continue to debate international versus U.S. or international and EM versus U.S., haven't made any moves yet. Certainly that's something we could see happening here before too long. So let's keep moving. I mean, precious metal has been so volatile and certainly have sold off over the last week along with the tech trades that's at least worth mentioning. So let's get into your Weekly Market Commentary first, Adam. So this is available on lpl.com. Really great job of walking through, not just the technical piece of the AI story, but also the fundamental piece in terms of yeah, I've heard it called the whack-a-mole, right? It's AI whack-a-mole and, and the the nature of the concerns about AI has certainly shifted. So why don't you take it away and I think you've got three Weekly Market Commentary charts in here.

Adam Turnquist (10:27):

Yeah, thanks. We'll dive right into it. It was really interesting topic to explore, especially as I tend to focus more on the technicals, but diving into what's really going on in the software space. There's so many different opinions out there ranging from, look, it is going to upend 50% on white collar jobs in the next year to no, this is completely overblown and investors should come in here and buy the dip. Those are kind of the two polarizing views. So we landed somewhere in between. Of course, we know that there's a lot of risk about AI disruption moving into different sub-industry groups beyond just the software names that have already been beaten up. We talked about the transports, areas of the financials, and that list is growing by the day. There was a new platform by Claude that focused on legal documents and basically streamlining that process for whether it's law firms or agencies involved in that.

Adam Turnquist (11:24):

And that was kind of a tipping point. And we highlighted that on this chart here, February 3. That's when that Claude legal plugin was announced. And that was a transformative shift, we'll call it, at least by some measures, because you had more of your generative AI responses where you were more traditionally using, you know, whether that's on Google or any of the other responses that come through on Copilot, you ask it a question and it returns a response. Well, now AI has moved ahead and evolved to actually moving ahead with tasks for your job across different industries. And that's what we had with the Claude legal plugin announcement. And when you think back of the news that created, that was created around that announcement and kind of leading up to it with concerns over AI disrupting other areas, it did give me a little bit of a flashback to the DeepSeek R1 moment of January last year, if you remember, there was a private China-based company that's created an AI model that was apparently more cost efficient and had equal compute power.

Adam Turnquist (12:33):

That kind of upended the AI story temporarily in January. We had NVIDIA, for example, selling off around 20% in a matter of weeks, right around that announcement. And there was this huge concern about the durability of capex spending. Do you really need to spend this much if other models are more cost efficient? Well, <laugh>, we wrote a blog last week explaining that that story was short-lived, and those fears were short-lived. We had, I think over 600 billion in expected capex just among what, five hyperscalers, if I remember correctly. And that number's just growing and growing and growing. So, it was, I think, a good reminder of how the market can immediately go to worst case scenarios when they discount new information that we don't really know the outcome yet. And a good reminder of maybe combining fundamentals and technicals as we do in our Weekly Market Commentary, where we kind of dig in what's the disruption.

Adam Turnquist (13:32):

So far we've seen in the fundamental story how oversold are these stocks? Of course, they got very oversold in January, February. But then we had the tariffs. Obviously we don't have the hopefully new tariff announcements comparable to Liberation Day in April last year. But definitely a some similar or some parallels going back to the DeepSeek news. And you can just see when you compare the NASDAQ back then to the NASDAQ now, the AI trade was arguably a little bit tired, a little bit crowded as well. So there was, we'll call it some healthy consolidation without even the narrative that was probably likely. So we're seeing some similar price action, maybe a little bit more pronounced right now with the big tech trade.

Jeff Buchbinder (14:18):

Yeah, I think that's a really important point here with this chart. We're not saying that the NASDAQ's going to follow this path. <Laugh>, right? The, yeah, the sell off. It was essentially a bear market in everything growth oriented, right? The overall S&P 500 almost entered a bear market last year around the tariff scare. So, but the point is well taken here. You had an AI scare with DeepSeek and we have another AI scare, I think with Claude and these sort of business tools that that could upend business models or certainly impair some of them. So good stuff there. Let's, let's move on to software. I mean, I think this is where the, you know, the "buy the dip" crowd is maybe sniffing around most you know, we are talking about earnings in software here that estimates have gone down. They could go down.

Adam Turnquist (15:13):

Of course. Yeah, they've been hit hard in just about every direction. Of course, this has been nearly unprecedented selling pressure. This is the North American Tech Software Index. I think it's just over a hundred, mostly large cap software names within this index. And you can see on the far right, it's been a beyond a fall from grace. This has been a precipitous drop and extremely oversold levels. Now, as we highlight here, oversold, does that mean the selling is over? Not always. I think you have to be leery of the initial bounce. A lot of times these take some time, we always consider bottoming more of a process than a V-shaped recovery. Although you certainly can have a V-shaped recovery. We are at a major support level. As you can see, this goes back to the 2024 lows, the April lows. And when you measure and try to quantify how oversold the index is, we used relative strength index on the bottom panel, and that's a record low.

Adam Turnquist (16:11):

We were in the mid-teen type readings. We've never seen that since the index inception going back 20 plus years. And we're getting a little bit of a bounce here off support. We'll call that a move in the right direction. But I think you have to be careful before waiving the all clear in technical terms, I think you'd want to get back above around on the index here around 1950. So call it another 10 plus percent higher and recapture some of these prior support levels. And then also some key retracement levels of this rally, but completely washed out. Very, very oversold. I'll be looking for momentum divergences if we get back to the initial lows from earlier this month, is RSI making a higher low and are seeing more accumulation. We've had really impressive dip buyers coming in in the retail space, and they have been pretty good market timers over the last few years, really going back to the pandemic days where they were kind of the first to come in. They were certainly last April when we had the lows, so we'll see how it plays out. But they had record retail buying in some of the ETFs that track this index earlier this month. We'll see if they show up this week and continue buying because I know software down a little bit here Tuesday morning.

Jeff Buchbinder (17:33):

Yeah. So this is not like a flip the switch, like tariffs come on, tariffs go off. We have a pandemic. We don't, right? This is a debate that's going to continue. There's not going to be sort of a right answer revealed in the next week or two. So it is going to take some patience here. Now if you're a long-term investor, we think there's some excellent, excellent opportunities in tech for sure. But if you're just trying to pick a good entry point for the next several months that's tricky. So let's get in the fundamentals a little bit, Adam. Certainly where I live more the yeah, I mentioned estimate cuts in software. It's really hard to know if this is all we're going to get in terms of cuts because analysts kind of take some time to figure out where this is going to or at least try to figure out where this is going to land. But this is a meaningful reduction in estimates.

Adam Turnquist (18:28):

Yeah, so looking at the same index, we've had analysts come out cut earnings per share by just over 10% in four weeks. When we look at the rate of change, really in the last month where you've had notable revisions here, that's the most we've had since December 2018. That was more of a Fed induced sell off when they were there's a kind of a famous fed pivot from December to January, 2019 and markets sold off pretty heavily. Not to the degree that we're seeing now, of course. And then also just on the other valuation metrics, enterprise value to estimated next year sales. A bit of a mouth mouthful there, and I had to do some digging on. There's so many different valuation metrics, why this one's more common in the software space because earnings are more volatile, often negative for the software company. So revenues are a little bit better metric.

Adam Turnquist (19:21):

And the enterprise value is really just the cost to acquire a business. Looking at just market cap, I think plus net debt minus cash. So maybe an easier metric for these software companies that are a little bit more a little harder to analyze on maybe a P/E basis. So the story though, they're cheap, right? And is it cheap for a reason? You can see we're at I think six times EV to estimate an extra sales that was, it's really kind of trough levels or near trough levels. We've seen in some of these other instances where we've had software rebound. And I was surprised when looking at some of the other metrics outside of just the enterprise value and some of the sales. When you look at overall earnings growth for the space, very robust, even though they've been cut 10%, we're talking mid 20% type growth for software margins are holding up.

Adam Turnquist (20:17):

You would think those would be deteriorating at a pretty good clip if they're going to have to discount to maintain customers. And then revenue growth as well looks pretty good. So it, the fundamentals of course, have deteriorated. We've seen the street react to this news, but I don't know if you could say it's commensurate with the price action, right? We're I think you can make the case maybe fundamentals are holding up across most metrics relative to price action. I don't know, Jeff, if you have a different view that that's my technical view.

Jeff Buchbinder (20:50):

Yeah, I mean, coming into this sell off, I would've told you a recessionary earnings reduction is around 15% for software, right? And we're pretty close to that. So, I would argue the software centers may be trading as if there's a three to, you know, maybe a 75% chance of recession. You know, you could still debate whether that's fair or not, given again, the market is worried about some business models really getting impaired. But anything in the low teens in terms of estimate cuts is very material. Now, the other side of this is the hardware side. You're not getting the estimate cuts. And overall, actually, 2026 estimates for tech overall are up during earnings season. So the rest of tech hass more than offset the software reductions. So there's underlying strength here. It's actually, it's kind of a dichotomy here, right?

Jeff Buchbinder (21:49):

If AI is going to eat these businesses, then clearly there's going to be some return from the AI infrastructure investment, right? So it's almost like the concern is conflicting. You probably can't have all this AI spending be wasteful and have AI eat the world at the same time. <Laugh>, right? So like you've said before, Adam, the right answer is probably somewhere in between and it's just going to take some time to play out. But the infrastructure spending's happening, and so we are absolutely getting interested in, more interested in the tech sector broadly. The PE of tech is basically the same as the PE of staples, right? That frankly, I'd rather take the growth in tech. That doesn't mean that tech beats staples next week or even next month, but again, for patient, longer term folks a year out this selling in tech I think is probably overdone and the enthusiasm for staples, probably overdone as well.

Jeff Buchbinder (22:49):

So that's great stuff. So again, this is in the Weekly Market Commentary, Adam, really, really nice job sort of spelling this out. And of course, AI is what really all everybody's focused on, I think right now. So that should generate a lot of interest. You can find it on lpl.com. So let's go into your chart check, Adam, I gave you a little bit of a break here. Return of a stock pickers market. The you know, again, dispersion when stocks are moving a lot in different directions, that tends to be a good environment for stock pickers and for asset allocators, frankly. So that's kind of the main theme of your charts this week. But of course we want to look at the S&P 500 and it's battle against that 7,000 mark.

Adam Turnquist (23:41):

The battle continues. We've had so many attempts to get through the 7,000 point, we'll call it a barrier resistance level, but have not been able to clear it. And I think part of the story is just techs not participating. The last time the tech sector made a new high was late October. And of course, software, a big drag in there. So I think sequencing here, and from at least my view on the technicals to get through 7,000, you're going to need to see tech participate more. Software, at minimum, stabilize, if not catch a little bit more of a bid here to really punch through, because tech is about a 33% weight, maybe a little less than that now within the S&P 500. So, it's towing an anchor right now with tech weakness and just volatility. So we've pulled back from that 7,000 point resistance level.

Adam Turnquist (24:31):

We took out the 20, the 50-day moving average here, really watching that 100-day moving average, 6,812 closely. That's been an area where buyers have stepped in. If we break that though, the, there's still quite a bit of support for the market here. You have the February lows 6,780, and then the December lows right around 6,720. Now, that's going to be a key level we're going to highlight in a minute. Still to get to the low end of the range, you're talking kind of 6,535 on the S&P, and that's really how you view this market right now. We've had a huge rally and now we're just consolidating. I'm not, you know, I don't think that technicals suggest here by any means we're near a market top, breadth is pretty robust. We've had more of a generally cyclical leadership tilt in the market.

Adam Turnquist (25:21):

So those are some levels to watch this week. Again, that December lows support level 6,720 an important one if we start getting down there. Within the market, I thought this was really interesting. We measure momentum different ways, and this is the relative strength index. If you go back, just wanted to highlight the RSI because we haven't really seen this before or very often where you have the internals very overbought. You have right now 20% of S&P stocks, overbought based on RSI, but yet the actual index level RSI at 43. Usually when the market's overbought, the RSI of the index and the internals get overbought. So it really speaks to this broader rotation. And we, the last time we've seen this is it's really been more of a mid cycle type signal. It has not happened near market tops. It's usually where tech consolidates. And that's really the story. So again, I think it speaks to maybe we're going to need to see the tech sector participate a little bit more for this market to really break out.

Jeff Buchbinder (26:31):

I got a little too excited about the December lows holding

Adam Turnquist (26:34):

<Laugh>. Yeah,

Jeff Buchbinder (26:35):

But here is your December lows holding and what it means, really important development based on the data that you see.

Adam Turnquist (26:43):

Yeah, so this is another seasonal indicator that we look at, and it basically looks at the market if it breaks below the December lows in the market, being the S&P 500 here, within the first quarter, how this is how it historically has performed. So when it breaks below those lows, full year returns are pretty weak. 0.6% on average here, as we highlight on the far right, and you're only higher around 55% of the time. So pretty low positivity rate when you think about just all years over the last 75 years, market's higher, I think 73% of the time on an annual basis. But if we can hold above the December lows, again, 6,720, that's a pretty good signal for momentum to continue. And you have average full year returns for the index almost up 20%, and you're higher on the year 94% of the time. So a huge contrast between breaking the December lows or holding above those December lows. Now we still have, what, six weeks left of the quarters <laugh>, and who knows what's coming down the pike for headlines, but for now we're holding that level, but certainly want to see it continue for the next several weeks.

Jeff Buchbinder (27:57):

Yeah, right now we're trading about 6,785, so maybe 65 points of cushion, not a lot. We need those dip buyers to come in and support tech. All right, so more on the internals here,

Adam Turnquist (28:12):

Right. So this is our trend model that we look at and I won't get too far into the weeds, it's just a, we define trend across different buckets using different moving averages. And we break down the market by sector to see what sectors are in what type of trend. On the far right, you can see confirmed uptrend in the table that we included, and that's our strongest trend. So that means your short-term moving averages above your intermediate, intermediate above your long, 46% of the S&P in a confirmed strong, what's called a strong uptrend. That's pretty good. You could see we've kind of held that level for quite a while and going into this year, despite some of this volatility, and the simple story is, look, there's more green on the screen, meaning there's more S&P stocks in some form of an uptrend.

Adam Turnquist (29:01):

Couple call outs though, on sectors to watch maybe is just the potential downtrend category. You have healthcare 27%, tech 22%, and then financials creeping up around 14% as well. That's where you start to see early signs of weakness, and they roll into more of the developing downtrend. You could see consumer discretionary and financials getting a little bit 58% and 29% on the kind of bottom of the downtrend model. A little bit concerning there when you think about leadership and with financials, <laugh> and consumer discretionary lagging. But I would say I push back on the financial side with banks doing quite well and holding up. So I think it's hard to get too bearish when you have home builders breaking out. You have financials breaking out, at least the banks breaking out and holding up pretty well. So it is a mixed story, we'll call it in some of those trends.

Jeff Buchbinder (30:00):

Yeah, it doesn't appear the market's gotten too worried about banks and the potential impact of AI. It's more been around the asset managers as you mentioned, Adam. So you know, I mentioned dispersion earlier that is I think one of the more interesting stories here in this AI whack-a-mole game we've been playing here. Looks like from this chart, dispersion's about as high as it's been in recent years.

Adam Turnquist (30:30):

Certainly moving higher. This is the S&P Dispersion Index. So when that moves higher, of course it's indicative of higher dispersion in the market as you described earlier. And then we have the correlation for the S&P. So how closely stocks are moving together on the bottom panel. So high dispersion, low correlation, that tends to do well for active management, that's why we called a, there's a blog title out today called a Stock Pickers Market or "The Return of the Stock Pickers Market". And AI's really at the center of this, where you're getting disruption in AI, as we talked about, across industries, some winners and losers that's creating some big up moves, some big down moves across different industries. But I would argue it goes beyond just AI. You have the One Big Beautiful Bill Act benefiting some sectors and some industry groups more than others.

Adam Turnquist (31:20):

So some stimulative measures there, of course, better than expected, we'll call it, or improving economic data. We've seen a lot of overall GDP forecast for the U.S. move higher. So, there's other reasons outside of AI that have moved the needle here. One of the other ones that's been interesting is just when you look at fund flows in active management, right? So actively managed funds, they've really accelerated over the last few years. Now it's still a much passive is the dominant player that comprised most of the assets in the fund flow space. But actively managed funds have really made a notable move in terms of flows. I was looking at some data from JP Morgan earlier, and if you go back to 2021 in terms of U.S. ETF flows active was about 6% of those flows in 2021. They're at 32% as of 2025.

Adam Turnquist (32:20):

So they've accelerated and there's been more and more assets in that space, and that's just creating a bigger playing field, we'll call it. There's more people investing in stock picking versus more index type investing. And I think that's more of an ancillary factor, but I think it has made the dispersion move higher and some of the correlations move lower. So I guess for now for investors, this means maybe be active with your management sector rotation probably makes sense as we like to look at the market of course, and rotate to where the relative strength is. But I think this trend probably continues for 2026 and something we kind of highlighted in our outlook where it might be a little bit choppy. That's what history tells us about midterm election years as well.

Jeff Buchbinder (33:10):

Yeah, my father-in-law asked me about an active ETF so that he is not in the investment business that tells you that that interest is spreading really, really interesting development. So continuing on the sectors here, I mean this is the rotation in a nutshell, right? Like all the losers last year have been the winners this year and vice versa.

Adam Turnquist (33:34):

Right. And it speaks to the dispersion. You can see just the variance in returns for in blue, that's the blue bars are year to date. You have energy up 21% tech down five, and it's only mid-February. These are the type of kind of disparities you'd see at the end of year when you have a little bit more time. So huge moves. And as you had mentioned earlier, the winners from last year, that AI story that was all powered by look, put up a big capex number, the market rewards you, everything's great. That was tech, comm services, big rallies there. Well, that narrative obviously has changed from bubble fears of around capex to this disruption trade. And the more insulated sectors, like energy,, staples have been doing quite well, materials as well. We highlighted in the blog today as well, this idea of drinking water from a fire hose.

Adam Turnquist (34:27):

So when you have so much capital in tech, a lot of it's overweight and it starts to move in the other sectors, we'll call it like energy, a 3% weight in the S&P 500. It's not ready to absorb those fund flows quietly. And that's why I think part of this story, why you're seeing these outsized moves is even a little bit of a rotation can really have a big impact on some of these smaller sectors. Energy had, I think, 6 billion in net inflows last month, for example. That's the largest inflow month it's ever seen in the 10-year data history that I look back on Bloomberg. Materials another one that's had these massive inflows, and that's even a smaller sector weight, I think just, I think 2% in change. So that's driving some of these outsized gains. And again, I think it goes back to that dispersion trade as well.

Jeff Buchbinder (35:17):

Yeah, it doesn't take as much money to move those small sectors. So next you looked at relative highs versus relative lows by sector. What did this analysis tell you?

Adam Turnquist (35:29):

So we're trying to understand where the relative strength is in the market. At the sector level, we're seeing first and foremost more new highs versus the index, which is important. You have 150, almost 150 names putting up new 20-day relative highs. So we're looking at individual stocks versus the S&P when that ratio chart hits a new 20-day high, that's how they get on this list. Now you have utilities leading, which is a little bit of a concern, but you also have energy up there, industrials, quite a few names there, materials, consumer discretionary. So I would still call it a broad rally. The broadening theme, certainly playing out here, although there's maybe some early signs of defensive rotations taking place. Most of those I think you can offset by some of these other more cyclical sectors, like, we'll call it industrials and materials doing quite well. And then on the other side, on the right, that's the 20-day relative lows list, and there's only 21 names on that list right now. You have consumer discretionary, comm services, financials, so kind of spread out. That's about 12% of the S&P making new 20-day relative lows versus 19% on the relative new highs. You don't want to see this start to flip and have more new 20-day relative lows. You know, we're tracking still in and we'll call it positive territory here from our perspective.

Jeff Buchbinder (36:52):

Yeah. So there's been, it's been very targeted, right, in terms of hitting these, not just industries, sub-industries of these various sectors that you've, where you've seen the weakness. So it is good that the overall market has, you know, maintained pretty, pretty decent breadth and that's how the overall index has held up, right? We're not, I mean, we've kind of gone nowhere over the last several months in the broad index, even though technology has had such an outsized effect, right? When that's when the biggest sector falls, as you mentioned Adam, it's an anchor. So, you know, overall the story's not too bad. I think that's how I'd say it. I guess to close this out, Adam, before we preview the week, I'll just ask the question directly. So for folks who have new money, you know, would you be going, would you just be dip buying in tech in last year's winners? Or would you be actually playing this rotation and buying some of this year's winners? How do you make that call? Or is it a mix?

Adam Turnquist (37:57):

Maybe a mix? It's hard to argue with energy right now when you look at the technicals and what that sector's done without really much help from crude oil. I think that's kind of a market tell that these, you know, whether it's an EMP a servicer, they're all rallying substantially and outperforming, notable breakout at the sector level to through multi-year highs. You're seeing the relative trying to reflect. So maybe, maybe some tactical allocation there, but I don't think you want to throw in the towel on tech given its longer term trend. That's where the earnings power is, as well as you've highlighted for the last couple of years, right, where the story is still alive and well, you have these periods of consolidation and that's been kind of the storyline of this bull market where you have the tech sector do the heavy lifting, breaking out through major support or resistance levels, and then the rest of the market kind of follows suit. I don't think that sequencing, you can say is over. Maybe this is just a prolonged consolidation phase for the tech sector after a massive rally coming off the April lows. I do think there's going to be opportunity, especially for the stock picker in the tech space, maybe in some of these software names that you can kick the tires on and dig into what and where the disruption risk is.

Jeff Buchbinder (39:21):

Yeah, that's all fair. So stay fairly balanced because these rotations can reverse and as we've seen, you know, they can be pretty powerful. So thanks for that Adam. Let's quickly preview the week ahead as we wrap. Just core PCE I think is really the only thing on the economic calendar that has, you know, market moving potential. I would actually argue based on what we saw in the CPI, the PCE, you know, the Fed's preferred inflation metric actually has an upside bias. So, you know, I'm kind of going into Jeff Roach's economic data lane here, but I would argue the odds of a better than expected core PCE are low. Just leave it at that. So Adam, anything else here on the economic calendar that you think is interesting or, I mean really anything at all because there's certainly some policy news this week too.

Adam Turnquist (40:21):

Certainly PCE an important one. When you look at how often that misses by any meaningful measure, it's pretty minimal. The market usually gets it right, I think because there's other data ahead of it that helps triangulate around that number. So I wouldn't look for any major fireworks on the PCE side Friday. Obviously earnings are important. Slowing down a little bit this week ahead of the big one with NVIDIA, I think is next week if I'm looking at my dates right. So that's going to be an interesting one. I think we know the

Jeff Buchbinder (40:55):

The 25th.

Adam Turnquist (40:57):

What we hear from the company on that.

Jeff Buchbinder (41:00):

Yeah, that's right. The earnings aren't going to be as meaningful this week because we are only getting 57 S&P Oh, you got right there. Yeah. Right. And the I mean, Walmart's a big name and that matters, but beyond that it's really not as many household names until you get to NVIDIA next week. But earnings season's been very good. It's just that it hasn't been, been enough to offset the AI risks and you know, the market's probably going to have to wait for even another quarter of software fundamentals to get comfortable. We'll see, I mean, you're going to see a lot of software companies talk before they report first quarter earnings and maybe that can help. But we're, you know, we're through a lot of these software names. The only other thing I'll mention, you know, the FOMC minutes could be interesting but we still think the Fed's going to stay where they are until midsummer and that's where you could potentially get a cut.

Jeff Buchbinder (42:04):

And then lastly, the Supreme Court ruling on tariffs could come on Friday, so keep a lookout for that. That could cause some dispersion as well, Adam, because you know, for example, retailers are more tariff exposed. So if those tariffs are ruled illegal, you could see a little bounce in some retail names or some other tariff exposed companies potentially so that will be something to watch. The rebates probably going to be too complicated. I would argue that that's probably not going to happen, but that doesn't mean the market won't kind of buy the AI or buy the tariff losers, right, on the news, potential news that those tariffs are illegal. So I think we'll leave it there. So thanks Adam for a great kind of walkthrough of the state of this AI disruption that the markets have experienced here the last couple weeks. We're looking for opportunities. I think that's maybe the bumper sticker for this podcast is this is the time where you could potentially find some nice values. Appreciate you joining Adam, and we'll speak to you next week. Thanks, take care everybody.