Boost in Swing Trading Courtesy of Market Breadth Improvement

The preceding year predominantly spotlighted the “Magnificent Seven” stocks, leaving many investors grappling with the challenges of aligning with market-weighted indexes dominated by mega-cap corporations. However, as 2023 drew to a close, a positive shift in market breadth emerged, redirecting attention to swing trading strategies.

Exploring Two ETFs:
The realm of software has been a persistent point of interest, particularly as numerous computer software groups climbed the ranks within IBD’s 197 Industry Groups in 2023.

The iShares Expanded Tech Software Sector ETF (IGV) has been a focal point for software enthusiasts. This ETF is rich in software heavyweights, emphasizing “targeted” exposure, with the top five holdings carrying approximately 40% weight for the entire ETF.

On the other hand, the SPDR S&P Software & Services ETF (XSW) takes a different approach. As part of the State Street family, XSW utilizes a “modified equal weighted index” to offer “unconcentrated industry exposure.” None of its holdings surpass the 1% mark, preventing the top five holdings from exceeding a 5% weight of the total ETF.

The key takeaway is the significance of breadth, acting as a differentiating factor between the two ETFs. Around the Nov. 1 follow-through day, XSW wasn’t displaying strength, reflecting the ongoing struggle in market breadth. Given that relative strength plays a pivotal role in swing trading, XSW wasn’t deemed ready for prime time at that juncture. However, a few weeks later, a gap-up propelled the ETF well above its moving average lines, affirming its strength. This marked its entry into SwingTrader.

Broad Application of Swing Trading in Software:
An effective swing trading decision often manifests immediate positive outcomes. XSW validated this principle, delivering prompt feedback as the position saw a 2.5% gain within a couple of days. After consolidating gains, XSW found support at its 10-day moving average before experiencing another upward surge. This prompted the removal of another third of the position at a profit, with the remaining portion left to continue its momentum.

For the most part, XSW adhered to its 5-day moving average as it ascended, with occasional breaches along the way. However, by the year-end, it dipped below both its 5- and 10-day lines. As the new year commenced, the stumble persisted, leading to the decision to exit the swing trading position.

The Unfolding Narrative:
While the exit marked a conclusion to that specific swing trading episode, it might not signify the end of the narrative. The beginning of 2024 witnessed a decline in market breadth, despite recent index rebounds. If market breadth stages a recovery, XSW could potentially present another swing trading opportunity.