Here Are Your New AI Leaders

Nobody is going to say the market dip that lasted into late November was the equivalent of 2008, but it definitely was the most severe the market has seen since the April implosion by a variety of measures. On a broader scale, the percentage of stocks north of their 50-day lines on the S&P 1500 (that’s the small, mid and large caps combined) fell to 30%, the lowest level since April; and as for individual stocks, a ton of highflying AI leaders and other stocks clearly cracked intermediate-term support, with many giving up 30% or 40% from their spike highs.

Nobody is rooting for such a tough pullback, of course, but now that the market has bounced back solidly, it has allowed the wheat to separate from the chaff—whereas so many speculative things were flying a few weeks ago, now you can tell which names institutional investors were hesitant to sell during the dip and/or eager to buy once the market started bouncing.

Said another way, it sets up a classic Eggs versus Tennis Balls situation: Eggs are stocks that fall during a correction … and then splatter on the floor, and (mostly) just lie there broken. Tennis balls, of course, are the opposite, getting pulled down by a bad market for a few days or weeks—but then quickly snap back and regain most (or all) of their lost ground.

While not all eggs are “bad” stocks and we’re looking at shorter-term signs here (some eggs below still look fine longer term), the point is that, for the here and now, it’s usually better to focus new buying on the tennis balls—they’re the ones institutions are eager to get in, or were hesitant to sell in the first place.

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Let’s take a look at a few examples today in the tech and AI space:

Taking Stock of the Market’s AI Leaders

First are two mega-caps in the chip space: Nvidia (NVDA) and Broadcom (AVGO) are both great companies, but both are being affected by a new trend being seen within the AI space, with those more tied to OpenAI (like Nvidia) suffering some selling, while others more tied to Google (like Broadcom) finding buyers. (Many see Google’s latest AI advancements with Gemini putting it far out front of OpenAI for the moment.) Indeed, after trying to break out in late October, NVDA came right back down and hasn’t been able to bounce much and has been living below its 50-day line for two weeks. Meanwhile, while AVGO did crack the 50-day line for a bit, it’s raced back in recent days, actually tagging new high ground before easing of late. So far, NVDA is the near-term egg, while AVGO is acting like a tennis ball.

Those are well-situated mega-caps, so let’s look at the other end of the spectrum: So-called high-performance computing (HPC) stocks, which are essentially like landlords for the hyperscalers and neocloud firms, except instead of renting offices or living space, they’re renting computing power (sometimes with storage and usually electricity, too). There were three highfliers in this group, but interestingly, all look different post-correction.

Iren (IREN) might have been the biggest mover of them all, but it nearly got cut in half during the November mayhem, and it’s barely gotten off its knees in recent days, even as many tech stocks have. Then there’s Applied Digital (APLD), which is a bit better, getting hit hard from mid-October to mid-November and bouncing since then … but not overly impressively, only back to its 50-day line.

Now compare both of those to TeraWulf (WULF), whose correction, while sharp, looked far more normal on its chart—and it actually rallied back to its old highs last week! Things can always change, but WULF certainly looks like the tennis ball of the HPC theme.

Then we have three names that are outside the direct AI space—though, like most everything these days, there are links to it. Here I’m comparing two names that had beautiful earnings gaps in late October, just before the market rolled over. One is Cloudflare (NET), a name that I love fundamentally, but you can see the stock quickly imploded to multi-month lows after the gap, and the bounce has been modest at best. So far, it’s an egg.

Datadog (DDOG) is a touch better, but it’s mostly in the same camp—a complete give-up of the earnings move and, since the recent market low, it hasn’t bounced at all!

But then there’s JFrog (FROG), a stock that’s on my Watch List in Cabot Growth Investor. The details of the story can be a bit of an ice-cream headache, but its platform allows clients to more efficiently manage, distribute and add security in the development of software, providing a single source of record for all the artifacts (which includes basically anything, from source code to images to diagrams or documentation), providing visibility into the process, while streamlining development, ensuring compliance and much more.

And with AI and machine learning models all the rage, JFrog’s modules are becoming more in demand as they speed up the development, training and deployment of AI models and agents; in fact, its platform is integrated into Nvidia’s software suite to build AI agents. As for the stock, notice how it gapped up around the same time as NET and DDOG—but it held most of its move and remains perched near highs, which is notable resilience.

Of course, this is how things look today—maybe the market has another wobble or two that continues to shake things up. But my larger point is that, while no one prefers down markets, using an eggs vs. tennis ball mindset can point you toward the stocks that are likely to lead the next advance.

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