Selling Slows in the Software Stocks. What Will Bring in the Buyers?

Last summer, the Magnificent 7 started sorting themselves out. You have heard me say this countless times since then. They no longer acted like a block. They no longer moved as one.

Take Amazon (AMZN) , which basically stalled out in July. It had that terrific pop in late October, and then gave it all up. But there is nothing magnificent about that chart. I would say now the only hope it has of improving is if it does an inverse of what it did in October’s gap up. So if Friday’s gap down gets back up over the line, it can save itself, but the point of this discussion is: one of the Mag 7 stopped being extraordinary last summer.

I can do the same exercise with Microsoft  (MSFT) , which we have looked at before. I described those twin peaks as looking like a bridge that has collapsed. But here too, we can see the sorting out. They don’t all have the same chart anymore. Now MSFT has finally filled that gap from the April low, so like most software stocks, it ought to bounce in this oversold condition we have.

The same way the Mag 7 began differentiating themselves last summer is the same way I expect the software names will begin differentiating themselves going forward. Friday, I used the example of matching the ETF  (IGV)  against the Sentiment Cycle, but will every stock in the group, which, for the most part, all look rather similar with the waterfall declines of the last month or so, look the same a few months from now? I doubt it.

Take a stock like Roper (ROP) , which is not a household name but has been in a serious downtrend for a year. The gap down in October looked bad, with high-ish volume, but look at how the stock couldn’t even recover (this is what I mean when I say we give broken stocks a chance to recapture the break because sometimes that’s all the selling we’ll see).

Now look at the gap down in late January. That volume is about 5x what we’d been seeing. But more than that, do you see the way the stock actually had a few days of rallying AFTER that break, something it was unable to do in October? It’s now been bouncing around this area for two weeks. It looks to me as if—at least for now—the selling has dried up.

But is there buying? I think it is too soon to say. But here is a chart that looks to be about two weeks ahead of most of the other software names, so doesn’t it make sense to see how it starts to sort itself out? My guess is there will be more rallying attempts in the name. Eventually, a pattern should develop.

If you are watching for signs of your tech stocks to bottom or signs there will be more selling, then this chart of ROP gives you both examples of what you are looking for. October: more selling. January/February: selling drying up. And that is how these broken stocks should begin to sort themselves out.

Aside from that, Friday’s rally looked like an oversold one to me. I wouldn’t be surprised to see some give back early this week, but then I’d expect some more rallying later in the week. And then when we work this oversold condition off, we’ll reassess and see which stocks are sorting which way.