Cloud stocks are soaring even on a down day for markets.
Three major cloud-based exchange-traded funds — the First Trust Cloud Computing ETF (SKYY), the Global X Cloud Computing ETF (CLOU) and the WisdomTree Cloud Computing Fund (WCLD) — outpaced the broad market on Friday, surging as investors embraced tech on a tough day for broader market.
The CLOU ETF was up more than 1% on Friday, while the S&P 500 traded in the red.
Punctuating the positive action was Citi analysts' upgrade of Workday on Thursday to buy on what they saw as the company's leadership in the enterprise software space, as well as Wednesday's direct listing of work management software company Asana.
One under-the-radar catalyst could be key to cloud stocks finishing the year strong, Matt Maley, chief market strategist at Miller Tabak, said Thursday on CNBC's "Trading Nation."
"What's really positive for this group is it flattened out in … July and August," he said, pointing to a chart of the SKYY ETF. "Well, the megacap tech stocks, the FAANGs including Nvidia and Microsoft, they just kept rallying."
As a result, the megacap tech names became "much more overbought" than the stocks in SKYY, whose top holdings are Oracle, Alibaba and VMware, Maley said.
SKYY "did pop up a little bit at the very, very end of the month, and then when the whole market started to come back down, it came back down. But again, it got right back into that sideways range," Maley said. "On a technical basis, this is really good. In other words, it didn't get ahead of itself as much as a lot of the other technology stocks did."
The key level to watch in SKYY is $80, the top end of its trading range, Maley said. The ETF traded at $79.66 on Friday.
"If it can break above that, it's going to be very bullish," he said, adding that it's already set up "very, very nicely" to outperform the mega-cap names.
"September sell-offs tend to bottom out in October," he said. "Whether the tech bounce-back's starting now or later in the month, either way I think the cloud computing group is really setting up for outperformance into the end of the year."
In other words, "Keep an eye on the sky."
Quint Tatro, chief investment officer of Joule Financial, emphasized in the same "Trading Nation" interview that the cloud space is a "very, very broad category."
While SKYY invests in larger-cap, slower-growing stocks, CLOU's top holdings are riskier and more cutting-edge names such as Zoom Video, Twilio and Zscaler, Tatro said.
"If you're liking that big momentum trade and you want that direct sort of cloud momentum, I think you can continue to look at these stocks, but I really think you've got to get cute a little bit and look at something like Snowflake," which went public on Sept. 16, he said.
"If these stocks continue to run, SNOW is a momentum name that could continue as well," Tatro added. "On the flip side, if you just want to get exposure in a nontraditional or nondirect way, I think you look at something like an Oracle."
Oracle's transition to software, increased margins and profitability profile still haven't been fully baked into the stock price, Tatro said.
"We're not big fans of the TikTok attempted acquisition, but nonetheless, Oracle's a subtle way to play the long-term cloud-based movement," he said.
Oracle shares were lower Friday morning.
Disclosure: Joule Financial owns shares of Oracle and Snowflake. Tatro personally owns shares of Snowflake.
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