In last weeks “Chart of the Week” column, we highlighted the relentless strength of the Technology sector ($XLK), and more specifically the fresh all-time highs from a variety of subsectors including Software ($IGV), Cybersecurity ($HACK), Cloud Computing ($SKYY) and Semiconductors ($SOXX). Today, we’re going to drill into one of those industry groups. It’s been one of the strongest areas in the overall market over the past several years and is showing no signs of slowing down. Just like healthy Sector rotation in constructive for the major indices and indicates broadened participation, healthy subsector, and industry group rotation is constructive for the individual sectors and subsectors themselves.
Right now, we’re observing rotation into a group of Software stocks that have been beaten down and underperforming the broader market for some time now, despite the strength from Software more broadly. That space is Electronic Gaming. As other areas of Tech are beginning to look extended, the Gaming ETF ($GAMR) is approaching a critical level of support relative to the S&P 500, which is a logical area for prices to carve out a bottom. The Gaming ETF also just hit its highest level since October 2018 on an absolute basis this week. Here is the ratio chart of $GAMR vs. $SPY.
As you can see, the ratio is currently testing the same level where price has put in key lows over the past several years. This area has acted as support in the past making current prices a natural place to look for a reversal in trend. Also, note the bullish momentum divergence as the 14-day RSI has made higher lows despite lower price lows. This technical signal is one of the most reliable indications of a price bottom or counter-trend move.
More importantly than the Gaming ETF itself might be some of its components, particularly some of the largest players in the space such as Activision Blizzard ($ATVI), Electronic Arts ($EA) and (TakeTwo Interactive) $TTWO. Not too long ago, these stocks were some of the top performers in the market. They’ve corrected through both price and time over the past 18-months and, after building constructive bases, finally, look poised to resume their long-term uptrends higher. Here are some bonus charts of the two largest video game makers, $ATVI and $EA.
Whether you play this trend through the ETF or some of these individual names themselves, all comes down to your personal situation and investing style. Of course, the ETF will provide a more diversified exposure and lower beta, while the individual stocks will offer a much greater reward potential but also carry more risk and volatility. One thing to keep in mind is that due to the equal-weighted nature of the $GAMR ETF, you aren’t getting that extra exposure to the largest players in the space as you would in a typical cap-weighted ETF. For that reason, I’d rather bet on the strongest names in the space individually. Regardless of how you play it, the takeaway is that Tech continues to lead, participation is expanding as constructive rotation takes place beneath the surface into areas like Gaming, and there are still plenty of opportunities abound.
I hope you enjoyed this post! As always, reach out to me at Strazza@thechartreport.com with any questions or comments.