Can Bulls Beat The Count?

Bears just put together their third straight weekly win. The rotation into software gave bulls one of their only bright spots last week.

The selling hit anything tied to momentum and AI the hardest. Some of those stocks took a far worse beating than others.

I keep picturing a boxer flat on the canvas. He has until the referee counts to ten to get back on his feet.

Bulls are on the mat right now. The referee has already started counting.

Headline risk remains as high as ever. The Fed hands down its rate decision this week, with the midterm elections arriving next week.

A fresh batch of earnings reports adds even more fuel. You could cut the tension in the tape with a knife.

This market is ready to erupt in one direction or the other. Big events like these can whip sectors around in a hurry.

Bulls still have a path back to their feet. The rotation into software shows exactly where that path starts.

Software tells me a lot about where the next rally comes from. It also tells me that rally could hit harder than you’d expect.

First, let’s look at where the money has been running.

Bulls’ Pain is Energy’s Gain

Energy is back on top of the sector leaderboard. Its return to first place caps off three weeks of bulls getting knocked down.

A different sector led each of those weeks.

Utilities topped the one-week leaderboard when this slide began. Consumer staples took over the following week.

Utilities and consumer staples are classic defensive sectors. Investors crowd into them for steady dividends and products people buy in any economy.

Investors spent two straight weeks playing it safe. Now energy is back front and center.

We’ve seen this story play out numerous times in recent memory.

Tech gets washed out while energy leads. Then energy decides to take a break.

Bulls are desperate for points right now. Almost anything will do.

Tech, consumer discretionary, and communications all have the potential to pull bulls out of their slumber. Consumer discretionary looks like it’s in the best position to do it near term.

The sector finished higher last week. Communications and tech got hit again.

Consumer discretionary covers what people want to buy rather than what they need. When that group rallies, investors are usually getting more comfortable with risk.

Tech took another hit last week. Under the hood, the rotation into software tells a much better story.

The Rotation Into Software Is Picking Up Speed

Software has been the silver lining in tech. Last week’s numbers show how strong the rotation into software has gotten:

• Software finished the week up 5.99%.

• Semiconductors dropped 2.33% over the same stretch.

• That’s a gap of more than 8 percentage points in a single week.

I’ve been pounding the table on the rotation into software. It’s been the only place to hide inside the tech sector.

A few months ago, the financial press was saying software was doomed because of AI. The fear was that AI would replace the products software companies sell.

Now software is dramatically outperforming chips. The rotation into software has played out just as I expected.

Keep the weighting in mind. Software makes up only around 20% of the tech sector, while chips account for roughly 40%.

Chips carry twice the weight of software. A 2.33% drop in semiconductors pulls on tech far harder than the same move in software would.

One great week can’t rescue the whole sector while semiconductors keep sliding. The rotation into software needs help from chips.

When the Rotation Into Software Gets Help From Chips

Now imagine what happens to tech when software and chips manage to rally together again.

Those two groups add up to roughly 60% of the sector. With both swinging in the same direction, tech gets its knockout power back.

I know it may not seem very exciting right now. That scenario isn’t far from unfolding yet again.

Three straight losing weeks feel brutal while you’re living through them. Pullbacks like this come with the territory in a bull market.

I use stretches like this one to find the next group of leaders. The rotation into software has already raised its hand.

Watch consumer discretionary for follow-through after its positive week. Keep a close eye on chips while you’re at it.

The day semiconductors stop sliding while the rotation into software keeps going is the day bulls beat the count.