One slice of the tech space is outperforming.
Ari Wald, head of technical analysis at Oppenheimer, calls this group a “must-own industry” and says the IGV ETF is about to break out even more.
“The ETF has pushed right up into its 2018 highs at around $206. That’s resistance. Aside from what could be a pause here, we think investors want to own this ETF ahead of what we think is going to be a breakout above this resistance level,” said Wald.
The IGV ETF is less than 1 percent from breaking out above $206. It fell below that level last week.
“You have a bullish trend going into it. You can see that rising 200-day moving average. The ETF also scores well in our momentum ranks. That speaks to the relative leadership,” Wald said Monday on CNBC’s “Trading Nation.”
Microsoft, which holds an 8 percent weighting in the IGV ETF, is an example of the type of software company likely to lead the group higher, according to Wald.
Wald said it is “also reversing its near-term downtrend and we think positioned to see a resumption of its long-term uptrend, so overall we think these high-growth companies continue to lead the S&P’s secular advance in this low growth world.”
The fundamentals of these software companies should continue to work in their favor, said Gina Sanchez, CEO of Chantico Global.
“One of the reasons it has done well is that it is a very profitable business. It has very high margins,” Sanchez said on “Trading Nation” on Monday.
The software ETF has profit margins at 30 percent of total revenue, according to FactSet, higher than the 20 percent margins on the broader S&P 500.
“If you can get it right, it doesn’t take a lot of extra effort to continue to sell thousands or even millions of licenses on a piece of software. It really just takes maintenance and continued maintenance,” said Sanchez. “On the investor side, you’re starting to see some fatigue but we’re not seeing that in the pricing. The markets are still rewarding these companies.”
The IGV ETF is just 2 percent from record highs. It has bounced 29 percent off its Christmas Eve lows.