Dip Buyers Absent as Software Selloff Hits Stocks Hard

The software sector is currently experiencing its worst selloff since 2022, with few dip buyers emerging to capitalize on the situation. On February 4, 2023, software stocks continued their downward trend, following a nearly 4% drop in the S&P 500 software and services index the previous day. This extended a six-day streak of declines fueled by fears of disruption overshadowing the initial optimism around artificial intelligence.

Declining Interest in Dip Buying

Unlike previous market downturns, where investors rushed to purchase undervalued software shares, this selloff has not attracted significant buyer interest. Steve Sosnick, chief strategist at Interactive Brokers, noted that customers appear less inclined to buy dips in software compared to sectors like precious metals and semiconductors. This change in behavior suggests a cautious stance among investors.

Defensive Strategies in Options Trading

Options traders reflect similar defensive sentiments. Chris Murphy, co-head of derivative strategy at Susquehanna Financial, observed a lack of enthusiasm for buying battered software stocks. He highlighted that traders are focused on downside exposure rather than pursuing dip-buying opportunities.

• iShares Expanded Tech-Software Sector ETF (IGV) shares fell by 3%.
• ARK Innovation ETF (ARKK) experienced a nearly 7% decline.

Microsoft: An Outlier

Despite the overall bearish tone in the software sector, Microsoft stands out as a notable exception. While its shares have decreased approximately 15% since reporting earnings on January 28, they rose about 1% on February 4. Analysts indicate that Microsoft, which doesn’t strictly fall into the software category, is showing unique buying interest amidst broader market turbulence.

Short Selling on the Rise

Short selling has surged as pessimistic traders capitalize on the sector’s decline. According to Leon Gross, a research analyst at S3 Partners, Microsoft’s short interest rose by about 20% over the past week. This trend indicates that traders are positioning themselves to profit from expected further weaknesses in software stocks.

As the selloff continues, the lack of dip buyers raises questions about the recovery potential for the software sector. Stakeholders will be monitoring the market closely for signs of a turnaround or continued declines.