Revealed: Tech’s New Leading Trade
In early April, the major averages were threatening to smash through their February lows and plunge stocks into a new bear market.
The stock market was spinning its wheels in a vicious cycle of bearish news. Political uncertainty was popping up whenever a story broke related to “trade wars” or the Mueller investigation. Toss in the Facebook congressional hearings and a Syrian chemical attack and you had a full buffet of market-moving news that had the bulls running for cover…
Of course, our focus as traders was trying not to step on any landmines as the market searched for direction. Instead of riding the news-cycle rollercoaster, we were hard at work rooting out any outperforming names that could emerge as new market leaders once the dust cleared.
Even with the market teetering near its lows, some compelling charts were beginning to emerge. In fact, one of our top candidates for market leadership was just beginning to show its potential.
I’m talking about cybersecurity.
When we last checked on this group back in the spring, the PureFunds ISE Cyber Security ETF (NYSE:HACK) was miraculously outperforming the Nasdaq Composite year-to-date, posting double-digit gains well before the end of the first quarter.
HACK was displaying all the telltale signs of market leadership. Cybersecurity stocks did an exemplary job hanging onto their gains as the major averages tested their correction lows at the start of the second quarter. A picture-perfect bounce from HACK in early February helped the cybersecurity ETF maintain its gains during difficult market conditions — and set the sector up for an incredible run.
After lagging the broad market for most of 2017, these stocks have become tech leaders. Need proof? Just check out how HACK has performed vs. semiconductor stocks so far this year.
HACK and the VanEck Vectors Semiconductor ETF (NYSE:SMH) parted ways in early April. While the semis struggled to find direction, cybersecurity stocks blasted higher. HACK is now up almost 25% year-to-date. SMH is up almost 10% — not too shabby, but still lagging the Nasdaq Composite by almost 4% on the year.
While semiconductor stocks enjoyed a quick run to new highs in March, they have since struggled to regain the strong momentum that propelled them to huge gains last year.
You might recall that we stepped away from our SMH trade in late June as it was beginning to consistently underperform. Don’t get me wrong — the sector doesn’t appear to be teetering on the brink. We’re simply seeing better options to book outsized gains in the tech space right now.
Just look at our two open cybersecurity plays: Imperva Inc. (NYSE:IMPV) and
Palo Alto Networks (NYSE: PANW). Our longer-term play on IMPV is up an impressive 42% so far this year alone. PANW is even stronger. It’s up 50% and counting year-to-date.
More importantly, IMPV’s impressive run higher this month has helped push the stock above a long-term sideways chop that had trapped shares for two and a half years.
I know how difficult it is to shut out the noise during volatile times like these. But as you can see with our successful cybersecurity plays, the big gains are had when we ignore the latest headlines splashed across our screen and focus on market leadership and price action.