The software sector today looks a lot like the energy sector looked back in November (JMU November 4). In other words, software stocks are setting up for a rally.
Look at this chart comparing the software stock ETF (IGV) to the S&P 500…
The software sector has lagged the broad stock market for the past ten months. As a result, relative to the S&P 500, software stocks are cheaper today than they have been at any time over the past five years.
Of course, that’s because Artificial Intelligence is destroying the business models – so say the market pundits.
That’s probably true to a certain extent. But, the great software companies will pivot. They’ll use AI as a tool to increase their user base. And, they’ll prosper.
This is not any different than the way the oil sector looked a few months ago. Back in November, everyone was talking about solar and nuclear offering an alternative to oil. And, the oil sector (XLE) sold off to its lowest relative value to the S&P in five years.
The best performing sector over the past few weeks is oil (XLE).
I suspect a few weeks from now, we’ll say the same thing about software stocks.
My one hesitancy – as I mentioned to my Alliance subscribers in a call Wednesday morning – was the dramatic shift in financial TV sentiment since last week…
Software stocks bottomed last Thursday. At the time, EVERYBODY on all the financial TV networks was bearish on the sector. By Wednesday, though, following a violent bounce off the bottom for the big software names, most of the talking heads’ comments towards software were bullish.
So, I told subscribers I would prefer to see one more decline towards last Thursday’s lows – just to shake out the folks who were scrambling to be bullish.
The recent action is serving that purpose.
I won’t argue that right now is THE bottom for the software sector. The stocks could indeed fall for a few more days, test last week’s lows, and maybe even make new lows.
But, I will argue that if you’re willing to buy into the sector, and then go take a six-week nap, you’ll likely be pleasantly surprised when you wake up.
Best regards and good trading,
Jeff Clark
Editor, Market Minute