RJ Hamster
AI Is Eating the World, and This Sector Is…
AI Is Eating the World, and This Sector Is the Appetizer
BY MICHAEL SALVATORE, EDITOR, TRADESMITH DAILY
In This Digest:
- Software continues to buckle under the weight of AI
- Why Energy is the no-brainer trade right now
- How a momentum tailwind combines with a top Quantum Edge rating
AI is eating the world, and these companies are the appetizer…
Here’s your regular reminder of the most toxic trade in the market right now: software-as-a-service (SaaS) companies.
SaaS companies create software and rent it out. Instead of paying once and owning the software, customers pay every month to access it through the cloud.
Think Salesforce for sales teams. Workday for HR. Adobe for designers.
The problem for these companies is that AI is leveling the playing field for software development. It’s making it easier than ever for even amateur programmers to build useful, scalable software that fits their needs.
For example, the CEO of buy-now-pay-later company Klarna (KLAR) has said it’s shutting down its Salesforce and Workday accounts. The company will lean instead on AI-enabled internal agents that do the same work at a lower cost or with more control.
And that’s just the tip of the iceberg.
Thanks to coding assistants like Anthropic’s Claude Code – which let you create software by simply chatting with an AI – the competitive moat of SaaS firms is in jeopardy.
Leading SaaS firms are taking at hit to their share prices as a result. In yesterday’s trading, Adobe (ADBE) dropped 7.3%, Intuit (INTU) fell 10.1%, Datadog (DDOG) was down 7.3%, Workday (WDAY) was down 7%, and Atlassian (TEAM) fell 7.7%.
But you don’t have to know a thing about AI or the SaaS model to know these stocks are toxic right now. You can just follow the simple traffic light signals our Short-Term Health indicator generates.
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We warned you that each of these stocks was a “sell” two weeks ago…
In your Jan. 21 Daily, we warned you that these stocks were all in their Short-Term Health Red Zones.
Short-Term Health is a new spin on our classic Long-Term Health indicator. Just like Long-Term Health, it uses a stock’s historical volatility to judge whether it’s in a healthy uptrend or a perilous downtrend.
This new version is tuned for much shorter-term moves, designed to catch more powerful trends that last months, not years.
When a stock is in a Short-Term Health Green Zone, it’s a buy. When it’s Yellow, it’s a “hold.” When it’s Red, it’s a “sell.”
I hope you took our advice and avoided this group… or even targeted them for a bearish trade. (If you did, write us at feedback@TradeSmithDaily.comand let us know.)
SaaS companies may one day turn around. But right now, they’re caught in a downward spiral with no clear bottom. Steer clear.
A bullish trade is setting up in the energy sector…
Oil prices spiked 2.8% yesterday after the U.S. shot down an Iranian drone approaching its aircraft carrier in the Arabian Sea.
This follows weeks of rising tension between Washington and Tehran – starting with Iran’s violent crackdown on domestic protests and escalating as U.S. naval deployments increase in the region.
Iran supplies only about 4% of the world’s crude oil. But about 20% of global shipments pass through the nearby Strait of Hormuz. If tensions continue to mount, oil prices could shoot up.
And this all comes at a time when the world’s AI datacenters are gobbling up energy so quickly, they’re rapidly facing bottlenecks.
AI datacenters accounted for about 4% of all U.S. electricity consumption in 2024. And total energy consumption is expected to more than double by 2030 and grow 30-fold by 2035.
At the same time, global energy production slowed down in 2024, at an annual pace of 1.6% from 2.2% the year before. So as demand is rising, supply is declining – a textbook recipe for higher prices.
But let’s close the economics textbook and look instead at our analytics platform, TradeSmith Finance.
Because there’s even more to love about the energy sector there.
Right now, the Energy sector is lighting up on Short-Term Health. But unlike SaaS companies, it’s lighting up Green.
Take a look at the market sector breakdown based on Long- and Short-Term Health distributions:
What you’ll notice is that Energy is second only to Materials (XLB) in terms of the number of stocks in the sector in Short-Term Health Green Zones.
The Materials sector has just over 92% of its stocks in the Green, with the rest in Yellow. And on Long-Term Health, just under 85% of stocks are in their Green Zones as well.
In the Energy sector, 81.8% of stocks are in the Green on our short-term metric, with the remaining 20% split evenly between Yellow and Red. But Energy has the most Long-Term Health Green Zone stocks of any sector, at nearly 91%.
These are both supremely healthy sectors on both short- and long-term timeframes.
There’s also the simple fact that the Materials sector (XLB) is up almost 10% this year… and Energy is up more than 13%, making it the best-performing sector of 2026 so far.
So let’s focus there and find the best energy stocks to trade right now…
To do that, we’re going to look beyond the broad energy sector and focus on the companies within that sector with the best fundamentals, best price action, and clear signs of big money buying pressure.
And regular readers know we’ll do this easily with Jason Bodner’s Quantum Score.
Before joining the TradeSmith team, Jason was the Head of Equity Derivatives at financial services firm Cantor Fitzgerald.
His job there was executing multimillion-dollar trades – even billion-dollar trades – for some of Wall Street’s wealthiest investors.
When you’re buying that much stock, you tend to leave tracks. These can alert other investors of your intentions. And if you’re not careful, they’ll pile in and push prices up before you fill your entire order.
That’s why, when you were an institutional investor in those days, you called Jason. He was an expert in covering up your tracks while you bought in.
Now, he uses those same skills to spot when institutional investors are taking unusually large stakes in stocks. Then he alerts his subscribers to these money flows so they can profit.
That’s where his Quantum Score comes in. It first ranks thousands of stocks by their fundamentals – revenues, profits, margins, etc.
Then it ranks the best stocks’ technicals. A high technical score means a stock is the target of heavy institutional buying.
The combined Quantum Score points you to the best stocks with the highest institutional interest. And one of my favorite ways to use it is to target a sector with multiple other factors at its back – like the Energy sector today.
Here’s a simple screen looking at TradeSmith’s Energy sector category, ranked by Quantum Score.
Those stocks are Cactus (WHD), Innovex International (INVX), Diamondback Energy (FANG), Valaris (VAL), and HF Sinclair (DINO) – each rating in the top 10% of the Quantum Score.
Note that all of these energy companies are focused on oil and gas – not wind, solar, nuclear, or any other high-tech energy play.
Also notice that four out of the five are small- or mid-cap stocks trading between $1 billion and $10 billion.
We’ve been beating the drum on the sector all this year due to the coming change in Fed leadership likely spurring rates lower, bringing outsized benefits to smaller companies, which tend to borrow to fund operations.
All the companies above are ones to keep on your watchlist in February and beyond as the broader energy theme plays out.
To building wealth beyond measure,
Michael Salvatore
Editor, TradeSmith Daily
