No matter what your political opinion is, if you follow politics you understand there is a potential threat to the election process. The degree of the threat isn’t secure, and the potential source is also unclear. But, as local election boards move to voting machines instead of paper ballots, the threat of hacking those machines becomes real.

While elections are a threat that is in the headlines, the reality is that almost everything in modern society is at risk of hacking. Every corporate server is a potential  target of hackers and home networks can be a target.

But, less understood is the fact that other targets exist. Many cars are connected to networks that push upgrades to systems and correct errors in previous versions of software. Even systems within the car are connected via network connections.

Fears of hacking even extend into our bodies. Last year, “The Food and Drug Administration (FDA) recalled 465,000 pacemakers after discovering security flaws that could allow hackers to reprogram the devices to run the batteries down or even modify the patient’s heartbeat, potentially putting half a million patients lives at risk.”

An Industry to Fight the Cyber Threats

As networks become increasingly important, a new industry has grown up to combat the threats. Stocks in the cybersecurity sector could be excellent long term investments since these threats will not subside in the future. In fact, cyber threats are likely to increase.

Leading stocks in the industry include:

Palo Alto Networks, Inc. (NYSE: PANW)

PANW provides firewall appliances and software; Panorama, a security management solution for the control of appliances deployed on an end-customer’s network as a virtual or a physical appliance; and Virtual System Upgrades, which are available as extensions to the virtual system capacity that ships with physical appliances.

It also offers subscription services covering the areas of threat prevention, uniform resource locator filtering, malware and persistent threat, laptop and mobile device protection, and firewall, as well as cyber-attack, threat intelligence, and content control.

In addition, the company provides support services; and professional services, including application traffic management, solution design and planning, configuration, and firewall migration, as well as online and classroom-style education training services.

The stock has been a market leader for some time.

Zscaler, Inc. (Nasdaq: ZS)

ZS operates as a cloud security company worldwide. The company develops a software-as-a-service based security platform that secures access for users and devices to applications and services.

It serves airline and transportation, conglomerate, consumer good and retail, financial service, healthcare, manufacturing, media and communication, public sector and education, technology, and telecommunications service industries.

SailPoint Technologies Holdings, Inc. (NYSE: SAIL)

SAIL designs, develops, and markets identity governance software solutions in North America, Europe, and the Asia Pacific. The company offers on-premises software and cloud-based solutions, which empower organizations to govern the digital identities of employees, contractors, business partners, and other users, as well as manage their constantly changing access rights to enterprise applications and data across hybrid IT environments.

Its solutions include IdentityIQ, an on-premises identity governance solution; IdentityNow, a cloud-based multi-tenant governance suite; SecurityIQ, an on-premises identity governance for files solution that secures access to data stored in file servers, collaboration portals, mailboxes, and cloud storage systems; and IdentityAI, a cloud-based identity analytics solution for organizations to detect potential threats before they turn into security breaches. 

This stock has also been a market leader.

Okta, Inc. (Nasdaq: OKTA)

OKTA provides identity solutions for enterprises, small and medium-sized businesses, universities, non-profits, and government agencies in the United States and internationally.  The company offers Okta Identity Cloud, a platform that offers a suite of products to manage and secure identities, such as Universal Directory, a cloud-based system of record to store and secure user, application, and device profiles for an organization; Single Sign-On that enables users to access their applications in the cloud or on-premise from various devices with a single entry of their user credentials.

The stock price is breaking resistance and could be set for a significant move.

Fortinet, Inc. (Nasdaq: FTNT)

FTNT provides broad, automated, and integrated cybersecurity solutions worldwide. It offers FortiGate hardware and software licenses that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, Web filtering, anti-spam, and WAN acceleration; and FortiSandbox technology that delivers proactive detection and mitigation services; and FortiSIEM family of products, which offers a cloud-ready security information and event management solution for enterprises and service providers.

The stock has been in a strong up trend and a pull back is possible after the sharp gain.

Any of these stocks could be a winner. But, there is no guarantee any stock will increase in value. Therefore, it is important to consider diversifying which could require owning several of these companies.

Investors who want a diversified exposure to the industry can consider the ETFMG Prime Cyber Security ETF (NYSE: HACK). This exchange traded fund offers a way to benefit from the growth of cyber security without needing to pick the potential winners in the sector.

It is also important to have a risk management strategy for all investments. Some investors manage risk with stop loss orders. This strategy requires placing sell orders below the entry price of a position. For example, an investor could place an order to sell if prices fall by 10% or 20%.

In a fast moving market, stop loss orders could be executed significantly below the desired price level. To avoid that risk, some investors manage risk by position sizing.

For a position sizing strategy, the investor allocates a set percentage of the account to each position and accepts the fact they could lose the entire amount. This could be implemented by allocating 2% or 5% of the account to each position. Position sizing may require a large account.

Investors could also consider using call options. These are available at prices significantly below the price of the stock and could deliver large gains if the stock moves higher before the option expires. Call options could be used by long term investors by simply purchasing new calls whenever one expires.

These strategies could help investors benefit from the cyber security sector without suffering excessively large losses if the sector crashes.

Every August, economists from around the world converge on Jackson Hole, Wyoming for one of the most important conferences of the year. Many years, the Chair of the Federal Reserve addresses the audience.

Source: Federal Reserve Bank of Kansas City

This year, according to CNBC, Federal Reserve Chairman Jerome Powell said “he expects a slow but steady diet of interest rate increases to continue as the central bank looks to find the right recipe between promoting growth and controlling excesses.

In his closely watched speech at the Fed’s annual retreat at Jackson Hole, Wyoming, Powell expressed confidence in the economy and said he does not see inflation getting out of hand.

As a result, the current trajectory the Fed has been following since December 2015 is unlikely to change so long as there aren’t any significant changes to economic trends. The central bank, he said, is focused squarely on not stepping in to halt economic momentum but also wants to be a bulwark against runaway growth.

“I see the current path of gradually raising interest rates as the [Federal Open Market Committee’s] approach to taking seriously both of these risks,” he said…

“As the most recent FOMC statement indicates, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate,” he said.

At several points in the speech, Powell referenced former Chairman Alan Greenspan’s leadership of the Fed in the 1990s.  In particular, Powell noted that Greenspan waited for evidence of inflation before acting, leading analysts to believe Powell may be nearing an end to the interest rate hikes.

“The takeaway from Jackson Hole is that the Fed may not look to tighten much more than is currently priced into markets,” Mark McCormick, North American head of FX strategy at TD Securities in Toronto told Reuters.

What Powell’s Philosophy Can Mean for Investors

Analysts with Evercore/ISI noted that “market participants / sentiment from those we spoke to today perceived the Powell speech / policy trajectory as quite dovish—especially given the myriad downside global risks from trade and emerging markets and midterms, etc on the horizon.”

These analysts concluded that traders should take a “risk on” approach to the markets based on Powell’s comments. A risk on approach involves investing aggressively.

Risk on and risk off are considered to be trading strategies by traders. Risk on is aggressive and risk off is more conservative. Hedge funds tend to follow this strategy which is widely referenced in the media and is usually considered to be a short term strategy in the markets.

In the U. S. markets, a risk on environment indicates investors should consider increasing exposure to small cap and tech stocks.

Investors can increase exposure to small cap stocks with a single exchange traded fund, or ETF, if they choose to. Among their options are the iShares Russell 2000 Index Fund (NYSE: IWM). The chart below shows this ETF is in a strong up trend.

While many investors may consider new highs to be a sign that a stock or ETF should be avoided, the truth is new highs often lead to more new highs. This can be seen by looking back to March 2017 in the chart above, a time when IWM reached new highs. A blue arrow highlights that area.

IWM broke out of that consolidation, pulled back and then began reaching a series of new highs. While there were occasional declines, for the most part prices moved higher. The breakout from the consolidation, in hindsight, was an ideal time to buy.

On the right side of the chart, the most recent price action shows that IWM has again broken out of a short consolidation and could be moving towards more new highs. Now could be an ideal time to buy with a stop near the recent lows which would be below $165.

To obtain exposure to tech stocks, the Invesco QQQ Trust (Nasdaq: QQQ) could be used. This ETF tracks the Nasdaq 100 index which includes the largest tech stocks trading on the Nasdaq system. The chart below shows that prices recently broke out of a consolidation.

Risk Beyond the U. S.

Some traders will want to look beyond the U. S. for their portfolios and here they may find emerging markets to be appealing. Emerging markets are an asset that tends to rise during risk on periods.

This all points to potential gains in emerging markets. Investors can gain access to these markets with another ETF, iShares MSCI Emerging Markets ETF (NYSE: EEM). This ETF has been in a pullback as the chart below shows.

Analysts have been increasingly bullish on these markets. LPL Research noted, “We’ve emphasized before that we expect the economic growth rate for emerging markets (EM) this year will be the highest for any global region, and we still believe this is the case, even amid currency turmoil.

EM economies as a whole are still in the early stages of an economic recovery and stand to benefit from robust consumer demand and dynamic global output changes. We also believe the U.S. and China will reach an agreement on trade that avoids any significant negative impacts to either economy.”

Risks are important to consider with this and any investment. Among the most important risks to consider is Turkey where the currency has reached new all time lows.

Source: LPL Research

“Recent events in Turkey have been understandably unsettling for investors,” according to LPL Research Chief Investment Strategist John Lynch. “However, we believe the current situation in Turkey will remain relatively contained, and emerging markets’ strong fundamentals will prevail after currency and trade fears subside.”

Even after considering the risks, many investors may find EEM to be attractive, especially in a risk on environment. Eventually markets will transition to a more conservative position but for now, analysts seem to be bullish and investors can consider becoming aggressive in this environment.

The Fed is often the key to the “risk on / risk off” background and until Chairman Powell turns bearish in his comments, the market is likely to deliver strong gains in aggressive sectors including small caps, tech stocks and emerging markets.