Equifax Inc. (EFX) stunned Wall Street and the American public last week when it reported a massive security breach, but no one should be surprised given the refusal of major corporations to adequately fund the high-tech security systems needed to protect customer information. Blinded by short-term profits, CEOs and boards have taken the easy route, slashing or redlining technology budgets while exposing shareholders to avoidable losses.
As a result, security stocks have underperformed the broad tech universe throughout this year’s historic rally, but the funding environment may be changing due to public outrage as well as major liabilities generated by this negligent decision making. Sadly, it is too early to tell if recent apologies mark the start of longer-term cybersecurity solutions or just public relations officers trying to get the issue off the front pages. (See also: New Equifax Security Breach Because Password Was ‘Admin’: BBC.)
The PureFunds ISE CyberSecurity ETF (HACK) reflects this sector’s slow evolution, lifting to a seven-week high in reaction to the most recent shocker. The fund came public in the mid-$20s in November 2014 and entered an immediate uptrend that posted an all-time high at $33.91 in June 2015. It got pummeled during the August mini-flash crash, dropping to an all-time low at $18.29, and completed a double bottom reversal near that level in February 2016.
The subsequent bounce gathered steam into 2017, finally stalling out at the .786 Fibonacci selloff retracement level in May. It broke down from a small-scale head and shoulders top in July, hitting a five-month low at $28.38, while a recovery wave into September pushed back above the broken head and shoulders neckline two weeks ago. This technical event has triggered a buy signal that should support a test at the second quarter high. (For more, see: 2 Cybersecurity ETFs to Consider.)
Symantec Corporation (SYMC) shares topped out at an eight-year high in the upper $20s in 2013 and dropped into a trading range with support just below $20. The stock broke down in 2016 and hit a three-year low, ahead of a powerful recovery wave that mounted three-year resistance in February 2017. The advance stalled at $33.22 in May, giving way to a pullback to breakout support and the 200-day exponential moving average (EMA), followed by a bounce and August retest that completed a small-scale double bottom reversal.
Strong action off the summer low reached resistance at the second quarter high earlier this week, triggering a minor thrust to a new high, followed by a pullback. The stock could now turn lower and fill the Sept. 8 gap between $30.60 and $31.30 before a breakout that targets the 2005 all-time high at $34.05. On-balance volume (OBV) is flashing mixed signals in this regard, carving three lower highs since May, signaling a modest deficiency in institutional sponsorship. (See also: Symantec: Morgan Stanley Ups Price Target.)
FireEye, Inc. (FEYE) came public just above $40 in September 2013 and rallied to an all-time high at $97.35 in March 2014. It plunged into the mid-$20s in the next two months, with that level offering support into a 2015 breakdown and downtrend that bottomed out at $10.35 in March 2017. The stock surged higher into May, hitting an eight-month high at $16.25, and then eased into a rectangular trading range.
It broke range support in July, hit a three-month low at $13.74 and surged higher in early September, gaining ground in a strong buying impulse that broke first quarter resistance earlier this week. The 2016 high at $19.63 is likely to slow or stall progress, but the buying impulse reaching that level will also complete a broad basing pattern, setting the stage for even higher prices in 2018. (For more, see: Is FireEye Interesting During Its Current Revival?)
The Bottom Line
Cybersecurity stocks are posting modest gains following the massive Equifax hacking incident, but stronger price action may be delayed until corporate boardrooms take the threat more seriously, allocating the information technology funds needed to build hack-proof databases. (For additional reading, check out: Cybersecurity Stocks for 2017.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>