It may be time to take a hard look at software.
Technology stocks have been on the rise after last week’s vicious pullback, gaining over 1% in Wednesday’s trading session and nearly 4% in the last week.
But some analysts are advising investors to tread carefully in tech, particularly because some parts of the space look a lot better than others.
“Enterprise software stands out as better than semis and hardware to me,” Mark Newton, president and founder of Newton Advisors, said Wednesday on CNBC’s “Trading Nation.”
“It’s still right to be in technology in the short run,” the technical analyst said. “I just think you have to be a little bit more selective in what you buy in this stage of the rally.”
Newton pointed to two charts of the Technology Select Sector SPDR Fund, an exchange-traded fund tracking the S&P 500′s tech and telecom stocks. The first, a shorter-term chart, showed an uptrend that appeared to be intact.
“Both the declines in May and also in late July really failed to breach the longer-term trends in XLK,” Newton noted. “Really, it’s still a case of buying dips.”
But the XLK’s 10-year chart painted a slightly different picture.
“You are starting to see some real momentum waning,” he said. “That really is more of a warning sign … than, really, a sell [signal]. My thinking is, for most trend followers, it is proper to wait until XLK gets under [$]75 until you really decide to get rid of it, and, near term, you can still make some upward progress to 82 to 84.”
The XLK was at $80 Thursday morning.
Strategic Wealth Partners President and CEO Mark Tepper was on board with Newton’s software call.
“First things first: I do believe the bull market’s still intact, but when you’re in the later innings, we have to be more defensive. And we love the tech sector. We’re overweight. But hands down, we prefer software over semis, just like Mark does, so that really gives us a more defensive posture,” he said in the same “Trading Nation” interview.
The “defensive” nature of the software sub-sector comes from the group’s recurring revenues and generally high margins, both of which provide some much-needed “downside protection when the economy slows,” Tepper said.
“One of my favorite names here is Salesforce, ” which reports earnings Thursday afternoon, Tepper said. “Quarter after quarter, they execute, but the stock price really hasn’t moved. It’s up only 7% this year. The concern has been that if the economy slows, enterprise spending gets cut, but a CRM program is really the engine behind a business. It’s the last expense a business would cut. So, we’re overweight tech, but we do agree: stick with software over semis. ”
Salesforce shares were flat in Thursday’s premarket, a day after climbing more than 1%.