Weekly Update: Software is King
Good evening, and welcome to this week’s edition of Stealth Trades!
Anyone who reads my research knows my approach – identify the theme of the market and maintain a laser focus on the best stocks in those top-performing groups or sectors.
The 2023 bull market has been powered by the artificial intelligence theme. Super Micro Computer, Palantir, Nvidia, and other big-name AI stocks have been the key driver of gains this year.
When looking at the performance of various sectors this year, this AI theme is crystal clear.
Semiconductors, crypto and software have smoked pretty much everything else since January.
Energy, biotech, banks and solar, on the other hand, have been among the worst performers.
But some of these trends are beginning to shift.
Take crypto, for example – the hot pink line on the chart above. Although prices rose hard in the first few months of the year, they have been declining steadily since June.
The chart below zooms in a little closer to examine performance over just the last 30 days.
Now we see this more clearly.
The solar space continues to be an absolute dog, but crypto stocks have joined the party at the back of the bus. Semiconductors have also pulled back a few percent although not much.
Energy, on the other hand, is beginning to emerge and show short-term strength. We bought Tidewater (TDW), an oil and gas transport stock, in my Alpha Stocks service a few weeks ago and it is now making new all-time highs.
The clear winner, however, is software. Not only is this the best-performing group year-to-date, but it has continued to outperform all other areas of the market even during this short-term correction.
The message is clear… software is king.
The exchange traded fund I watch to track the sector is IGV- iShares Expanded Tech-Software ETF. Its top 10 holdings are below.
Every one of these stocks is within spitting distance of its highs.
Faced with this mountain of evidence, I don’t see a reason to focus anywhere else. If our goal is outperformance, we need to focus on our bucket. And right now, that bucket is software stocks.
With that in mind, here are few of my favorites right now:
Vmware (VMW)
This is a weekly chart. And as you can see, VWM has not been able to clear the $170 level for the last four years. That is significant resistance.
A move through this area could finally trigger the next wave higher for the stock.
The daily chart below shows the most recent price action.
After a powerful move higher, shares have consolidated for the last few weeks in a compressing pattern above the 21-day EMA. This is very constructive action.
As long as VMW holds above its 50-day moving average (red line on chart) I would be bullish on this stock.
Kyndryl Holdings (KD)
KD is another stock pushing up against a big resistance level.
The enterprise software company went public in late 2021 just in time to get murdered by last year’s bear market. But KD is now trying to break out.
After carving out a bottom and putting in a textbook Stage 1 base, the stock is poised to begin its first Stage 2 uptrend. Historically, this is where the largest gains are made in newer stocks.
If KD can get above the 17.25 level and do so on above-average volume, I would absolutely consider taking a position in this stock.
Cardlytics (CDLX)
To give you an idea of what I am hoping to see from KD above, this is what it should look like.
The stock carves out a bottom over a period of 6-12 months, breaks through resistance (white horizontal line on chart) on high volume, and then doubles in short order.
CDLX is now trending nicely.
Dips to the lower side of the channel or pullback near the 21-day moving average are all buyable as long as momentum continues. I would use a stop loss to risk no more than 10-15%.
Best wishes for your trading,