The chop continues. 

June was a weak month for stocks, with the S&P 500 ETF (SPY) and the Invesco QQQ Trust (QQQ) both finishing the period lower.

SPY closed down a little over 1%, while the QQQs sank 0.26%.

These aren’t panic-inducing numbers. But the indices don’t tell the whole story.

Artificial intelligence (AI) CapEx stocks sold off hard into the end of the month. Last week, Micron Technology (MU) fell 13%. SanDisk Corp. (SNDK) plunged 17%. 

These have been two of the clearest, most liquid leaders of the AI trade lately. And when leaders start lagging, traders need to pay attention.

They weren’t alone, either. Plenty of other AI stocks have been getting hammered. The VanEck Semiconductor ETF (SMH) even dropped 12% during the final two weeks of June. 

Does this mean that the AI trade is finished? It’s far too early to say. 

You see, it’s not as if the entire market has been falling apart. Money has simply been rotating into other areas. 

Healthcare stocks have been strong, particularly biotech. Financials have caught a bid. And we’ve seen a healthy rotation into software stocks, led by cybersecurity. 

Still, the AI trade has been the driving force of this entire bull market. Semiconductors are also the biggest and most important group in the market, outside of the “Mag 7” names.

So we can’t just shrug this off. If the AI trade falls apart, the market could have major issues.

I’m not saying that’s happening, but I am watching semis closely for clues. That starts with SMH, which invests in a basket of semiconductor stocks. 

In the chart below, we can see SMH is heavy right now. However, it’s pulled back into its rising 50-day moving average. This is a major level for both retail traders and institutions.

As we go to press, SMH is down slightly on the day and is trading just below its 50-day moving average. 

Another close below the 50-day wouldn’t be ideal for semis or AI stocks at large. But it also wouldn’t be the end of the world.

What we don’t want is for semis to live below this key level. 

The other thing I’m watching for is the AI leaders to emerge—either new names or proven winners.

One name on my radar is Dell Technologies (DELL). Its chart looks much different than most AI stocks. It’s only slightly off its all-time highs and is still trading above its short-term moving averages. 

Penguin Solutions (PENG) is another name I’m watching like a hawk. PENG reported strong earnings yesterday and is up 19% on its report as I write.

Like DELL, PENG is still an A+ setup despite the recent weakness we’ve seen in other AI stocks. 

If PENG can hold this earnings move, that would tell me there’s still an appetite for AI stocks with strong fundamentals.

What I’m looking for right now is the real leaders to hold their ground while the weaker names get shaken out. That’s how healthy pullbacks often play out.

But this is also the kind of market where you need to be careful. The AI trade is still alive, but it’s getting more selective. That means the easy-money phase is over and stock selection matters more than it did a few months ago.This is why I don’t get married to one trade.

AI is still important. But I’m watching the whole board right now because leadership can shift fast in a choppy market.

That’s what I do every day inside my RiskHedge Live trading room: follow the strongest charts and let the market tell me where to go next.

Click here to join me in the trading room.

Justin Spittler

Director of Trading, RiskHedge