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Investing Strategies: Breaking Down The Software Sector’s Leadership

Investing Strategies: Breaking Down The Software Sector’s Leadership

Hi everyone and welcome to Investing
Strategies it’s Alissa Coram with Investors Business
Daily from the Nasdaq market site in Times Square today we’re breaking down
the stock market’s whipsaw action as of late How will investors know when the
coast is clear the founder and Managing Partner of Fairlead Strategies is here
to share what she’s seen in the market right now
and we’ll also analyze a few software stocks worth watching now the software
sector has no doubt produced some of the biggest gainers this year so I’ll be
walking you through IBD’s key tactics for identifying sector leadership plus
we’re sitting down with a head of research and strategy at global X to
learn about an ETF that’s offering investors a way to play the hot cloud
computing trend investing strategies starts now alright let’s get started with this
week’s market insights with me for today’s discussion is Katie Stockton
founder and managing partner at Fair lead Strategies thanks so much for being
here Katie of course glad I could join alright so we have seen quite a volatile
market as of late I think some whipsaw type action maybe a little bit of a
head-fake with S&P and Nasdaq getting back above the 50-day line last week but
that’s now looking to be short-lived what indicators are you looking at right
now it’s funny it always seems to happen in August doesn’t it when it should be
quiet but of course the market never really cooperates in that way so what we
did see of course was a very sharp pullback for the S&P 500 I believe it
was about 7% from the high points of the low point of the pullback it’s not to
say it’s definitely over yet but there are some indications of that usually
pull backs in uptrends are very sort of fast and furious and the indicators that
I watched to really signal the end of it are primarily the market internal
measures and those are things like sentiment and breadth or market
participation and when those reach oversold extremes we tend to have some
kind of entry underway for the market so the S&P 500 down sharply last Monday as we
all know he felt it very well that was our extreme day so that’s a day
that we got that extremely bearish reading and market sentiment data and
yet that’s a contrarian positive and we also got extremes in the market breadth
readings things like the percentage of stocks above their 50-day moving
averages that reached an oversold level – okay so how will investors know when
the coast is clear then I mean we’re keeping a very close eye on that 50-day
line maybe some resistance there but what support levels are you looking at
for investors to know when they might feel like they could get a little bit
more aggressive with their exposure port is really important so for the S&P 500
I’m watching roughly 28 50 the 200-day moving average is rising just bled 2800
so maybe that becomes a level of importance as well but I’d say even more
importantly we’re watching momentum gauges so we want to see momentum turn
for that all-clear signal for that confidence that indeed a
tradable low is in place unfortunately the momentum gauges turn
positive after we already have the low in place so we have the oversold
readings they tend to be a bit more sensitive but we’re more convinced once
we get these momentum buy signals these moving average and indicators things
like that they tend to flash decisive buy signals once the more markets ready
to get going again okay and you mentioned breadth and the importance of
having that can you talk a little bit more about that and and what exactly
you’re looking for as far as participation of the different groups
and what we’re seeing right right so when you look at breadth you can look at
it two ways as an oscillating gauge like the percentage of stocks about their
50-day moving averages or as accumulative gauge so looking at things
like the cumulative reading of advancers and decliners on the NYC so both are
very important what we want to see are no negative divergences and the
cumulative readings and indeed we do not have those at least the ones that I
track and then in the oscillating measures you want to see that oversold
readings so we do want to see participation of course come back into
the market as we rally it really is always the case for the most part and we
we do want to see it spread out to sort of a small and mid-cap arena which of
course has been underperforming relative to large caps that would be a really
nice complement to a momentum buy signal all right and with the headwinds that
we’re seeing right now with trade war tensions
what we’re seeing in Hong Kong right now what do you think investors should be
doing with their portfolios right now given some of these headline risks that
we’re still seeing some hedging is probably appropriate those hedges
obviously would have been better put on a couple of weeks ago we are starting to
see signs of short-term downside exhaustion in those regions that are
under pressure China for one Hong Kong those markets do have counter trend
signals that are somewhat promising but again we need to manage risk by waiting
for those momentum indicators to turn positive to really convince us that
indeed this oversold condition matters and and will then preserve support
levels okay well with that in mind let’s pivot to this week’s stocks to watch
starting with Akamai Technologies so Katie what are you seeing here
at my looking pretty resistant to some of the broader weakness that we’re
seeing holding up near highs that’s why it’s an important one to break up we’ve
seen very good out performance from Akamai this year year-to-date and it’s
really seemingly I’d say immune to the pullback that we have seen in the
broader software sector so that momentum is positive across time frames for
Akamai it’s not without an overbought condition but that’s sort of natural
when you do see the breakouts that have occurred so we have a relatively fresh
breakout at Akamai and I think that’s helped preserve its uptrend and until we
see any kind of loss of momentum I think we stay with that kind of set up yeah at
IBD we are seeing a recent breakout over a cup with handle pattern what level
would you be considering a bye for Akamai a little consolidation would be
welcome at this stage because that would help it sort of you know digest those
games if you will so in the mid-80s I’d be very interested in adding exposure
all right and then how do you factor in the fundamental picture with your buying
clearly technicals are a big focus but we are also seeing somewhat decent
bottom line growth here for Akamai well I trust the fundamentals to be really
the driver of those long term trends and because Akamai for one is in a long-term
uptrend I trust that that’s a reflection of the company what we try to do as
technicians is some sort of add value in the timeframes that it’s really market
driven the moves and that’s where we can you know manage our risk okay great and
then let’s also take a look at Salesforce CRM a little bit of a
different looking chart here one of the big names in the software space below
its 50-day and 200-day moving averages what is your take on the chart well
another one that’s important to highlight because it has underperformed
so dramatically here today so that makes it a standout in a negative way and it
yet if you look over the very long term at CRM it’s a very well-established
uptrend the loss of momentum is distinct and yet it’s still an uptrend
technically and you do have an oversold breeding and that is somewhat promising
so if we see some stabilization here I would say roughly sort of in the high
one 30s that would be promising for CRM but not until you get that momentum
shift what I say that the long-term uptrend is ready to resume all right so
around 1:30 is that where you would be looking to get in here or I 130s and
that’s where there’s some support on the chart all right yeah and speaking of
fundamentals you know double-digit growth on the top and bottom lines that
is always good to see and like you said that long-term uptrend is intact so
we’ll have to see where it goes from here agree all right Katie thank you so
much for sharing your insights today really appreciate it and coming up next
I’m gonna walk you through IBD strategies for identifying leading
sectors and the leading stocks in those sectors so back in a minute
this season on cultural capital we are in New York City and San Francisco come
with me as I tour some of the world’s most innovative companies from
Squarespace to c3a I defeat and figma learn how CEOs built growing companies
while maintaining the ultimate office culture on season 3 of cultural capital
on the brand-new okay now the best performing stocks
almost always come from leading sectors and industry groups and that’s no
coincidence so when you’re looking for stock ideas it’s good to start with
figuring out what those leading sectors are and why does this matter so much
well we’re trying to find the cream of the crop why buy the best stocks in a
poorly performing sector when you could buy the best stock in a top performing
sector the bottom line here focusing on those leading sectors and industry
groups will boost your success rate okay so there are a few ways to figure out
what the leading groups are one is by looking at IBD sector and industry group
rankings and the other is by screening and analyzing charts directly so let’s
start with sector and industry group rankings now IBD tracks and ranks
the performance of 33 market sectors and we further break those sectors down into
industry groups IBD tracks 197 of those our research shows that investors should
focus on stocks that come from the top quartile of IBD s industry groups how
savvy investors know that tracking industry group rankings can also be
helpful in determining sector rotation now just because a particular industry
group or sector is a laggard that doesn’t mean it can’t eventually become
a leader if the group turns around so when you see a group quickly move up in
the rankings that’s something you want to keep your eye on and the same thing
goes when you’re seeing a leading group that’s falling out of favor okay so IBD
sector and industry rankings as one easy way to find out where leading stocks are
coming from but you can also reach the same conclusion by analyzing stock
charts directly now remember last week we went over IBDs investing trifecta
top-notch fundamentals the strong chart action and favorable market conditions
and you’re investing routine it’s good to get in the habit of scanning stock
charts with those factors in mind and if you’re starting to see a lot of chart
pattern setups for high-quality stocks in a particular sector that’s our first
clue that there’s something you should be paying attention to here and if you
start to see break us to new highs from these setups that are working and
leading the strong gains well that’s further evidence of the type
of action seen among the strongest industry groups okay so to explain all
of this today let’s focus on the software sector that’s one of the
standout groups this year it’s collectively gained about
38% so far in 2019 and has only recently been outpaced by the aerospace sector
and only slightly all right now last week we looked at software sector
leaders cyber-ark and this week we’re going to take a
quick look at several other top software stocks that were setting up and breaking
out around the same time as cyber-ark towards the beginning of the year
ok so let’s rewind the clock a few months when stocks were just starting to
recover from the sell-off of 2018 that’s when many top software stocks were
setting up for example first let’s take a look at Coupa software which broke out
of a cut base in heavy volume in late January and extended its gains in the
following two sessions with strong volume as well now shares of the
enterprise software stock eventually pulled back a little bit here but it
formed a new base and Coupa broke out of that base in late April and is up almost
40% from that buy point and the stock is now working on a rare ascending base
which is marked by three pull backs with higher highs and higher lows and the buy
point here is at 148 10 now earnings growth for Coupa has been strong and
while analysts do expect a slowdown in earnings from an annual perspective
bottom line growth is expected to hit 273 percent in 2020 all right and now
let’s take a look at Zscaler from the security software group Zscaler
cleared a consolidation in early February and extended its gains after
posting a strong earnings report several weeks later now the security software
stock turned profitable just three quarters ago and has posted sales growth
between 59 and 65 percent over that same time period
now Zscaler has climbed nearly 80 percent since that breakout and last but
not least let’s take a look at Shopify and Shopify clear to consolidation
shortly after posting quarterly earnings growth of 73% in mid-february and the
enterprise software stock has now more than doubled since clearing that buy
point and the strong move has been accompanied by two quarters of
accelerating sales growth and the stock has also provided in
with multiple buying opportunities along its run to add chairs to their positions
now these are just a few examples of the many software stocks that have made big
moves this year many of those runs were sparked by breakouts happening around
the same time so if you’re continually paying attention to what the leading
sectors are in action within those sectors you’ll be in great shape for
finding leading stocks that are primed to make big moves and when we come back
Global X is going to help us drill down into the growth drivers we’re seeing in
the software sector and what that could mean for your portfolio you don’t want
to miss it pick winning stocks with MarketSmith growth 250 shows you ideas
with big potential view charts packed with key data use pattern recognition to
see action zones MarketSmith by Investor’s Business Daily try three
weeks for 19.95 now another way you can play the
software sector is by investing in a software focused ETF the Global X cloud
computing ETF CLOU isn’t sector specific but it does have a strong
weighting of top software stocks here now to take a deeper look at the ETF as
well as trends in cloud computing is Jay Jacobs he’s the senior vice president
and head of research and strategy at Global X thanks so much for joining me
today Jay thanks for having me all right so the software sector it has been such
a standout group this year what do you attribute to the strong performance that
we’ve seen broadly across the sector well we’ve seen this big bifurcation
within technology where tech hardware has been very affected by the trade wars
because they have to source a lot of their production through Asia they’re
selling into Asia but if you look at the software space it’s actually very much
the opposite it’s being developed in the United States most of the sales growth
is coming from domestic sources so it’s become kind of a tale of two different
types of technology with software much more insulated from geopolitical risk
right now interesting and then I feel like the strength is pretty broad –
whether it’s enterprise software cyber security so as a whole you know in the
different pockets it’s looking pretty good so far this year yeah I mean we’ve
seen a lot of strength out of the software as-a-service space thus a space
it’s a great business model these are you know companies are taking their
in-house IT and offloading it on to another company and getting you know
kind of constant updates of that software they’re getting cloud storage
of their data so that can be accessed anywhere and it’s a recurring revenue
model so they’re paying you know every quarter every month which again when you
start to see a little bit of shakiness in the global economy
knowing that cheque is going to come in every quarter give us a lot more
stability to that business and since we’ve seen such strong performances
broadly this year I think the question now is what’s going to keep that going
what sort of growth drivers are here that’s going to sustain the growth in
this group yeah I mean it what’s interesting about you know kind of cloud
computing more generally and software-as-a-service more specifically
is although these technologies have been around for a long time you know in some
cases more than 20 years it’s so early in the adoption curve so some estimates
show that you know only 50% of IT has really moved into the cloud or
moved into software-as-a-service so there’s still a huge addressable market
that hasn’t even been penetrated yet so you know companies that are very
involved in the SAS space don’t see you know our work here is done they still
have a lot more work to do in terms of selling into these new businesses and
that’s happening at the very large enterprise space as well as in the small
businesses around the United States that want to offload a lot more of those
services to cutting-edge software companies so it seems like there’s still
a pretty long runway for growth here and let’s dive into this ETF here so this
isn’t a sector specific ETF it’s rather tracking this cloud computing trend but
a lot of the names in the top 10 holdings are closely tracked by IBD we
have AnaPlan, Shopify, Coupa, Zscaler to name a few so this is weighted towards a
lot of these software stocks but tell me a little bit about why this in
particular is a great way to play the cloud computing trend and take advantage
a lot of a lot of these leading software names right so when we’re looking at the
mattock investing we are intentionally throwing out sector classifications
we’re throwing out geography because we don’t care we want to get the companies
that are best exposed to these themes so we’ve identified cloud computing as one
of these disruptive themes that’s going to change the global economy over the
next few decades and when you look into that feed you see that there’s a few
different segments that really are well positioned so the first two software is
a service we’ve talked about that a lot that’s a huge part of the theme because
this is just a very well developed industry there’s a lot of public
companies there’s a lot of pure-play exposure there so it naturally just kind
of gets more of the exposure of the fund but we’re also looking at platform as a
service companies that allow for an environment for people to develop new
software so the new SAS is being built on the platform as a service and then
we’re also looking at infrastructure as a service which is more of kind of maybe
the hardware side of all the storage and processing of that data that is powering
the cloud as well so we see that as the whole cloud ecosystem with SAS being
probably the biggest part by waiting in our fund okay and then touching quickly
on the performance of the ETF I mean you mentioned some companies that that on
the hardware side that have direct exposure to the trade war concerns but
software being a little shielded from that but it’s not immune
to the broader you know head winds and downdraft that we’re seeing but looking
long-term what is your anticipation for what we could see with the ETF where it
could be headed yeah we still feel very strongly about the positive outlook for
this over the long term and one of the reasons is so much of these SAS
companies are enterprise software providers so if you look at businesses
around the country if we end up into a protracted trade war if they’re trying
to figure out how to realign their business to make it more flexible or
more contained with risk I don’t think that’s actually a negative for these SAS
companies I think it could actually be a positive where these companies are
looking to kind of you know leverage software more effectively going forward
even in a kind of a pullback environment so I think the positive outlook is
strong regardless of what happens in the broader economy that’s right well it
definitely seems like we could see a lot of growth in this space moving forward
so we’ll definitely keep a very close eye on it Jay thank you so much today
thank you alright everyone thanks for joining us this week for Investing
Strategies i’m Alissa Coram and we’ll see you next time

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