Cyber Security Stocks Show Signs of Profit Taking: Will It Turn Into a Correction?

03/10/2015 5:36 pm EST

Focus: ETFs

Jim Jubak

Founder and Editor, JubakPicks.com

The market showed solid profit taking in the cyber security sector today, so MoneyShow's Jim Jubak suggests watching this ETF and individual stocks to determine if this could be a relatively shallow correction or if it argues for a deeper one.

Signs of what I call a Phase 1 correction today.

In a Phase 1 correction, investors and traders take profits in those sectors that have outperformed the market in the run up, but they don't sell the leaders in the sector.

The idea, I'd say, is to take profits and protect gains but to hold onto the really, really good stuff that you want to own for the continued outperformance of the sector.

Watching what happens to sectors experiencing a Phase 1 correction is a good way to tell if a correction of 3% for the general market is going to turn into something serious, such as a correction of 7%.

Today, for example, the market showed solid profit taking in the cyber security sector. Makes sense, these stocks have been hot, hot, hot with the PureFunds ISE Cyber Security ETF (HACK) up 9.97% for 2015 as of February 28 and up 9.68 in the last month as of March 9. Today, March 10, HACK fell 2.58%.

The biggest drops in the index were in the shares with the lowest institutional profiles. A stock such as Palo Alto Networks (PANW), which is a Wall Street favorite in the sector and that is thought to have one of the better business plans in the sector, was off just 0.13% today. On the other hand, shares of FireEye (FEYE), which Wall Street regards with some skepticism because expenses are growing faster than revenue in recent quarters, dropped 4.24%. Stocks such as CyberArk (CYBR)-with even less institutional traction-were down even harder, falling 5.35% today.

Keep your eye on HACK and individual stocks in the sector. If Palo Alto Networks continues to hold up even as the sector sees profit taking, I think that's an indication that this is likely to be a relatively shallow correction. If you start to see significant profit taking in Palo Alto Networks itself, I think that would be a sign that the market is getting nervous enough to put taking profits and protecting gains above longer-term potential. And that would argue for a deeper correction.

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