Last year was focused on the "Magnificent Seven" stocks as many investors bemoaned the difficulty of keeping up with market-weighted indexes dominated by the megacap companies. But at the end of 2023, market breadth improved. That's shifted some of the focus for swing trading.
A Tale Of Two ETFs
Software has certainly been an area of interest for a while and according to IBD's 197 Industry Groups, a number of computer software groups made themselves comfortable in the top ranks in 2023.
When focusing on software, we often look to the iShares Expanded Tech Software Sector ETF. It's packed with heavyweights in software and goes for "targeted" exposure. The top five holdings have a roughly 40% weight for the ETF.
The SPDR S&P Software & Services ETF is a different animal. It belongs to the State Street family and according to the State Street website uses a "modified equal weighted index" in order to provide "unconcentrated industry exposure." None of its holdings even surpass 1% of the fund so the top five holdings don't even reach a 5% weight of the total ETF.
In other words, breadth matters and is a distinguishing factor between the two ETFs. At the time of the Nov. 1 follow-through day, XSW wasn't flexing its muscles yet as market breadth was still struggling (1). Since relative strength is a critical component of swing trading, it wasn't ready for prime time yet.
But just a couple of weeks later and a gap-up put the ETF some distance above its moving average lines (2). After taking a breather, XSW gapped up again with a relative strength line confirming the strength (3). It joined SwingTrader that day.
Swing Trading Software Broadly
One of the easiest ways to confirm a correct swing trading decision is that it immediately starts working. XSW provided that immediate feedback and in just a couple of days we took off our first third of the position after seeing a 2.5% gain (4).
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As the ETF digested its gains, it found support at its 10-day moving average (5) before taking off again. We used that pop to take another third off in profits (6) and looked to give the remaining position room to run.
For the most part, XSW held its 5-day moving average as it continued higher with a brief breach along the way (7). But at the end of the year, it fell below both its 5- and 10-day lines (8). In the past XSW would quickly find support after stumbling. But this time, it stumbled further as the new year started (9). That led to its swing trading exit.
But that might not be the end of the story. Market breadth took a turn lower to start 2024 and still has some recovery to do despite recent bounces in indexes. If market breadth does return, XSW may provide another swing trading opportunity.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
