Software stocks are leading the tech sector, and broader market, in a strong start to 2019.
The XSW S&P software and services ETF has surged 7 percent in the past two weeks, better than the 3 percent gain on the XLK tech ETF and 4 percent advance on the S&P 500.
Ari Wald, head of technical analysis at Oppenheimer, says it makes sense to keep betting on the winners.
“We’re all about leadership as momentum investors,” Wald said on CNBC’s “Trading Nation ” on Monday. “Our overall macro view [is] that a premium is going to continue to get placed on these high-growth companies in a low-growth world.”
Some of the segment’s biggest names, including Adobe, Salesforce.com, PayPal and Microsoft, trade at an elevated valuation compared with the rest of the market. Salesforce, for example, trades at 54 times forward earnings, well above the S&P 500’s 15 times multiple.
Two software stocks illustrate how the group as a whole should continue its breakout, says Wald.
“First, the software company Salesforce made a higher low in December, while the rest of the market was selling off and fell to that extreme bottom,” said Wald. “Now, as the market turns higher, you’re starting to see Salesforce come out of the consolidation pattern it’s been in.”
Salesforce has added 4.5 percent in the past three months as the S&P 500 tumbled 6 percent. The company is still 8 percent off its October record high.
“Also, mobile payments company PayPal, breaking through multimonth resistance in a difficult market tape – we think that is telling. That’s the type of relative strength that we think you want to own,” said Wald.
PayPal has had an even better stretch over the past three months. The stock has surged 18 percent over that period in one of the best performers of the S&P 1500 software and services segment.
Boris Schlossberg, managing director of FX strategy at BK Asset Management, says Google parent Alphabet is a better bet.
“I kind of want to stay defensive, and I really like Google,” Schlossberg said on “Trading Nation” on Monday. “It’s held pretty well in this very, very soggy tape.”
While Schlossberg says its advertising business continues to thrive, the real potential is in artificial intelligence.
“They are leaders in artificial intelligence,” he said. “Some analysts think there could be a $20 billion hardware business going forward for them in artificial intelligence. That’s a story that the market really isn’t fully appreciating.”
Alphabet has fallen 2.5 percent in the past three months. Its stock is in a correction, having fallen 17 percent from its record high set in August. Any drop of more than 10 percent from 52-week highs indicates correction territory. The company is now listed in the communications services S&P 500 sector rather than technology.