HACK - Market Recovery: Semiconductors And Cybersecurity Stocks Leading (Technical Analysis)

2024-01-10 00:22:00 ET

Summary

• Semiconductors and cybersecurity sectors are leading the recovery in the equity markets.
• These two sectors kickstarted the broad market rally back in October, took a break, and upside momentum is now returning to them.
• After a mini market pullback between late December to early January, the risk-reward is attractive to get exposure to these two sectors now.

After a slight pullback in equities from December highs, the markets appear to be on the cusp of reversing higher. Two sectors are leading this recovery - semiconductors and cybersecurity.

These two sectors led the equity markets higher in October, helping to put in a bottom for the indices S&P 500 (SPY) and Nasdaq 100 ( QQQ ). In November, more exciting "story stocks" in the cryptocurrency sector took the leadership baton. Now, it feels like the momentum is returning to the former two stalwarts.

Below, I will show how the leading stocks within these two sectors broke out on Monday (8 January), and why this is a big tell that the equity markets are set up to move higher - likely to new all-time highs for the SPY and QQQ.

Semiconductors

First, let us take a look at the semiconductor sector.

The leading stock in this sector is undoubtedly NVIDIA ( NVDA ). It went on a big run-up in January 2023, and when the broad market was chopping back and forth, NVDA never looked back.

NVDA beat earnings in the last 4 quarters, which has contributed to its strength. Since beating earnings in August, NVDA has been building a base. On Monday, the stock broke out powerfully from this 4-month base on above-average volume. The path of least resistance is firmly higher.

Daily Chart: NVDA

On the same day NVDA broke out, Marvell Technology ( MRVL ) broke out higher on robust volume as well. MRVL gapped higher by more than +30% after beating earnings back in May. Since then, MRVL went on to build a base between August to December and recently broke out higher.

Daily Chart: MRVL

Advanced Micro Devices ( AMD ) is another leading light in the semiconductor space. While most growth stocks in the market are trading below their 10 and 20-day moving averages due to the recent market pullback, AMD has swooped above both.

The stock caught my eye back in early November when it beat earnings and broke above downtrend resistance. AMD kickstarted the broad market rally then. The stock also has a positive catalyst - the company launched an AI chip to take on NVIDIA back in early December. Since then, the stock has been marching higher. I am long AMD at $138.47.

Daily Chart: AMD

When we look at the ratio of semiconductors ETF ( SMH ) versus the SPY, we may observe that this ratio broke out of a big base back in May, and since then, semiconductors have been steadily outperforming the SPY.

Weekly Chart: Ratio of SMH vs SPY

Cybersecurity

Now, let us move on to the cybersecurity sector.

CrowdStrike ( CRWD ) is one of the only stocks within the cybersecurity sector that is now trading above its 10 and 20-day moving averages, which is a sign of strength. The stocks that are still trading above their 10 and 20-day moving averages during a market pullback are the ones most likely to outperform the broad market going forward. I bought CRWD at $258 as it broke out on 8 January.

Daily Chart: CRWD

Aside from CRWD, Zscaler ( ZS ) is another cybersecurity stock that is attempting to break above its 10 and 20-day moving averages. This is a stock that has been drifting higher on back of three consecutive earnings beats.

Daily Chart: ZS

Datadog ( DDOG ), similar to ZS, is also trying to break above its 10 and 20-day moving averages. The stock broke out strongly on high volume back in November after beating earnings. From here, it would be very constructive for the sector if both DDOG and ZS are able to reclaim ground above their 10 and 20-day moving averages.

Daily Chart: DDOG

Looking at the ratio of the cybersecurity ETF ( HACK ) against the SPY, we may observe that the ratio had built a base between October 2022 and September 2023, before breaking out higher. This bodes well for further outperformance in cybersecurity stocks against the broad market.

Weekly Chart: Ratio of HACK vs SPY

Conclusion

Overall, to summarise, the broad market saw a mini pullback from its highs made in December. January was also a poor start for stocks, until yesterday's (8 January) bullish recovery rally in leading stocks and the indices.

The two sectors that caught my eye are semiconductors and cybersecurity. Both kickstarted the broad market rally back in October, took a break, and it now appears that upside momentum is returning back to them.

After a mini pullback in equities from late December till early January, I believe the risk-reward looks attractive to get exposure to these sectors.

I am personally long AMD and CRWD and aim to add exposure to these two sectors.

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