U.S. software stocks are about to enter a period of seasonal strength. The North American Technology-Software Index has a period of seasonal strength from the first week in July to the last week in September. Average gain per period during the past eight periods was 9.0 per cent. The trade was profitable in six of the past eight periods. What are prospects this July?
The reason for seasonal strength in the sector is anticipation of revenue and earnings gains related to new consumer electronic products expected to launch prior to the Christmas shopping season. Companies are busy developing compatible software prior to launch of the next generation of new products. This year, the launch of next generation products prior to the Christmas shopping season is exceptional. Most notable are the expected launch of iPhone5 in October and the official launch of Microsoft’s Windows 8 operating system as early as this month.
Three North American software Exchange Traded Funds (ETFs) trade on U.S. exchanges. The most actively traded ETF is the Software iShares (IGV US$62.18). Management Expense Ratio is 0.48 per cent. The portfolio holds fifty four actively traded U.S. software stocks listed on U.S. exchanges. The second most actively traded ETF is PowerShares Dynamic Software Portfolio ETF (PSJ US$26.65). Management Expense Ratio is 0.60 per cent. The portfolio holds 31 software stocks. The third ETF is SPDR S&P Software & Services ETF (XSW US$61.49). Management Expense Ratio is 0.35 per cent. The portfolio holds 138 software stocks.
Investors can choose an ETF based on their risk/reward profile. The two most actively traded ETFs are fully diversified with well-known big cap software stocks. Top ten holdings in Software iShares are Microsoft, Oracle, SalesForce.com, Intuit, Adobe Systems, Citrix Systems, Red Hat, Symantec, CA and AutoDesk. The SPDR S&P Software & Services ETF focuses on small and mid-cap holdings with greater price volatility.
On the charts, Following is an eight year seasonality chart on the S&P North American Technology-Software Index.
Software iShares (IGV $62.18) has a positive and improving technical profile. Intermediate trend is up. Support is at $56.97 and resistance is at $66.69. Units moved above their 20, 50 and 200 day moving averages last week. Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index turned positive last week.\
Preferred strategy is to accumulate software ETFs and related equities at current or lower prices for a seasonal trade expected to last until the end of September.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst at Horizons Investment Management, offering research on Horizons Seasonal Rotation ETF (HAC-T). All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs. Daily reports are available athttp://www.timingthemarket.ca/
