As the Nasdaq climbed to new highs and left the behind, Jim Cramer looked to the charts for answers to which companies were really behind the record move.
The "Mad Money" host turned to technician Ed Posni, the managing director of Barchetta Capital Management and Cramer's colleague at RealMoney.com, for his take on the tech-driven rally.
Posni first noticed the Nasdaq diverging from the S&P in March. When the whole market got a boost in April, the Nasdaq took off while the S&P struggled to retrace its February highs.
What Cramer found particularly interesting was that the usual suspects behind tech-fueled rallies, the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google parent Alphabet), are also heavily weighted components of the S&P 500.
"In other words, the stunning rally in the Nasdaq is about more than just these high-profile stocks," Cramer said.
Posni started by comparing two key exchange-traded funds, or ETFs, to pinpoint one of this rally's biggest drivers: software.
The chart above shows the PowerShares QQQ Trust ETF, which tracks the Nasdaq 100, in red, and the iShares North American Tech Software ETF in green.
Since the start of 2017, the software ETF regularly outperformed the Nasdaq 100, a better measure of technology stocks than the broader Nasdaq composite.
"So when you see the software stocks outperforming the Nasdaq 100, it's a pretty clear statement that software is beating the rest of tech," the "Mad Money" host said.
As for Posni's favorite software plays, the technician first turned to Microsoft, the biggest player in the space. For the past eight months, its stock maintained a floor of support at its 50-day moving average, a sign Posni saw as an excellent buying opportunity.
The stock has since risen almost $5 from those levels, so Cramer said investors may want to hold off before purchasing shares.
Posni's analysis supported that notion as the Relative Strength Index, a key momentum indicator, put Microsoft's stock in overbought territory, meaning it ran too far too quickly.
"Ponsi notes that when Microsoft got overbought in the recent past, your best course of action has been to wait for the stock to come back down. Now, if history's any guide, you'll get your chance to buy this one closer to the 50-day moving average," Cramer said.
Microsoft wasn't the rally's only driver. Another was the stock of Salesforce, which has similarly been holding a floor of support at its 50-day moving average and has built up a bullish consolidation pattern.
"It's done so on low volume, which Ponsi says is pretty normal," Cramer explained. "Right now he thinks traders are waiting for Salesforce to break out to the upside on high volume, at which point he expects them to start buying it aggressively again."
Cramer likes the stock even more after a recent interview with CEO Marc Benioff, but suggested waiting for a pullback to buy shares.
"If you don't get a pullback and you don't already own it, you've got my blessing to put on a partial position on now," he added.
Finally, Cramer could not ignore Adobe Systems' run, especially since he owns shares of the digital media and marketing software player for his charitable trust, ActionAlertsPlus.
"Adobe has been on fire. It is up more than 30 percent year-to-date. I think it's emblematic of what's working in the software space," the "Mad Money" host said.
Posni particularly liked the stock's breakout move several weeks ago when it reached a new all-time high that helped it continue to make new highs since.
However, both Cramer and the technician suggested waiting to buy Adobe stock until it comes back to its 20-day moving average, where in the past it has found a floor of support around $31.
"Here's the bottom line: the charts, as interpreted by Ed Ponsi, suggest that this fabulous tech rally is being fueled, in large part, by some broad-based strength in the software space," Cramer said. "I think, because of all the power in those names, this move? It's far from over."
Watch the full segment here:
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