Rotation Into Cybersecurity Accelerates
Tom Bruni, Technical Analyst at AllStarCharts, provided a 'Chart of the Week' on Monday discussing the relative strength and recent breakout in Cybersecurity stocks relative to the S&P 500. This really is a great chart provided by Tom. For investors who follow the market daily, the strength in Technology, and specifically Cybersecurity, Software and Cloud Computing, during the Q4 correction and the January rally is of no surprise. In the last two weeks Cybersecurity has been the recipient of investor capital, breaking out of a consolidation since May relative to the S&P 500. Tom notes that this breakout targets the ratio's all-time-highs, about 12.5% higher.
"Sector rotation continues to provide opportunity on the long side as the major averages grind higher and Cybersecurity looks like the current beneficiary of that. As long as prices are above this downtrend line from their June highs, the outperformance in this space is likely to continue."
The vehicle being used to represent the Cybersecurity space is the Prime Security ETF $HACK by ETFMG. This is a relatively new ETF that was launched in late 2014. As we could have more price data history for HACK, let's dive in and take a deeper look at the charts of the top 10 components which include:
Proofpoint (PFPT) sold off -38% during the Q4 correction but has since rebounded viciously back above it's 200 day simple moving average. If the stock can consolidate this advance sideways and eventually work it's way through $130, it will be in blue sky territory.
Splunk (SPLK) spent most of 2018 consolidating in all-time-high territory after breaking out above the 2014 high. It is arguable that Splunk has built a shorter-term base on top of a long-term base, which is extremely bullish price action. Splunk is right back to the $130 all-time-high that was set in late August. It needs to break out and not roll over again here.
Cisco Systems (CSCO) is arguably the slowest mover in the group. Cisco broke out of a large base in October 2017 and has since trended higher. It has been consolidating below $50 for most of 2018. Cisco needs to break out if it wants to continue it's trend higher toward all-time-highs near $80.
Sailpoint Technologies (SAIL) is a newer issue that IPO'd in November 2017. The stock demonstrated the ability to trend higher and is building out a short-term base below $34. A breakout would be a great sign for the sector showing risk-on appetite after the smaller names.
Palo Alto Networks' (PANW) price action over the last few years has been much sloppier than during it's initial run from 2014-2015. You can see this volatility by zooming out on the chart. My concern with Palo Alto is it has had troubled staying above 2015 highs with a -30% correction in Q4. On the contrary, this could be a false breakdown. PANW is forming another shorter-term base below $235 where it looks to be heading back to.
CyberArk Software (CYBR) is the strongest name of the top 10 components in my opinion. After a clear trend in 2018 back to 2015 highs, CyberArk has consolidated sideways forming a multi-year base. While the consolidation was volatile, it did not form any sort of downtrend. This week CYBR broke out above all-time-high resistance of $80, making it the first name to new highs. That is bullish.
CommVault Systems (CVLT) is forming a base below it's 2013 highs. Since 2016, it has put in higher-lows and higher-highs. Near-term, CommVault needs to break above $71 before it can head to the 2013 highs near $90 and attempt a breakout.
Fortinet (FTNT) is another top stock within the top 10 components in my opinion. It is nearly 70% higher from it's 2015 base breakout. While FTNT has corrected -30% in Q4, the stock bounced off the 200 day simple moving average and is trading back towards the prior all-time-highs. A breakout above $93 and Fortinet will continue it's trend higher.
Qualys (QLYS) also fell -30% in Q4 but has since rebounded nicely and is forming a near-term base below $100. This stock showed the ability to trend from 2016 to mid-2018. The flat 200 day simple moving average is a bit of a concern as it can cause whipsaw moves in a stock. Overall, the trend is higher but be aware of a false-breakout situation.
Avast (AVST) is the 2nd newer issue in the top 10 components, IPO'ing in 2018. The stock has traded higher and has been consolidating below $300 forming a base. It initially broke out but fell back into the range. Now, Avast is attempting to head back and challenge the early 2019 all-time-high.
As you can see, almost 9 of the 10 top 10 components are trading at or right below prior all-time-highs. These 10 charts account for 40% of the $HACK ETF so I find it very hard to be bearish on this sector for an intermediate or long-term basis when this is the case. Some key words repeated over and over above include: base, trending higher and all-time-highs. These are all bullish terms. The Cybersecurity sector points to continued outperformance and should see an all-time-high test of the ratio relative to the S&P 500.
Note: all charts are as of February 6th, 2018 market close.