The S&P 500 Software & Services Index fell for the sixth consecutive trading session, but this selloff failed to attract any significant bottom-fishing buying. Even Microsoft, traditionally regarded as a safe haven, was not spared, with short sellers increasing their positions against the trend. Current market sentiment has evolved from valuation concerns at that time to deep anxiety over the potential disruption of traditional software business models by artificial intelligence.
The U.S. software sector suffered its worst sell-off on Wednesday since 2022, but the "bottom-fishing funds" that usually rush in during tech stock crashes were conspicuously absent.
After the S&P 500 Software & Services Index plummeted nearly 4% on Tuesday, it fell another 1% on Wednesday, marking its sixth consecutive session of declines. Unlike previous market pullbacks, this selloff failed to attract any noticeable bargain hunting.
Options traders similarly avoided software stocks, with trading flows showing investors adding defensive positions rather than seeking buying opportunities. Even Microsoft, traditionally seen as a safe haven, was not spared, as short sellers increased their positions against the trend.
This sell-off in the software sector was the most severe since 2022. In 2022, rising interest rates had severely impacted software stocks, but the current market sentiment has shifted from valuation concerns at that time to deeper anxiety over AI technology potentially disrupting traditional software business models. The collective avoidance of buying on dips by investors suggests that the market's view of the software sector may be shifting from a short-term correction to a structural reassessment.
Bottom-fishing funds are collectively missing.
Steve Sosnick, Chief Strategist at Interactive Brokers, noted a stark contrast with precious metals and semiconductor sectors, as the company’s clients showed significantly less enthusiasm for bottom-fishing in software stocks. “Overall, our clients are far less inclined to bottom-fish in software stocks compared to precious metals and semiconductors,” he said. “While some clients may be buying software stocks, it is certainly not the focus of their trading activity.”
This cautious attitude is even more evident in the options market. Chris Murphy, Co-Head of Derivatives Strategy at Susquehanna Financial, pointed out that the software sector remains under sustained pressure, with options trading flows still dominated by defensive operations.
In the options trading of the iShares Expanded Tech-Software Sector ETF and ARK Innovation ETF, traders are increasing their downside exposure rather than buying on dips. On Wednesday, IGV fell 3%, while ARKK ETF plummeted nearly 7%. Murphy stated that the overall tone of the software sector remains defensive.
Microsoft stands out as the sole bright spot, but short sellers are flocking in.
Sosnick noted that Microsoft is one of the few exceptions in the sector. Although the company is not a pure software enterprise, it has still attracted some buyers. Microsoft shares, which have fallen about 15% cumulatively since the earnings report on January 28, rose approximately 1% on Wednesday.
However, even Microsoft has not been immune to the attention of short sellers. Leon Gross, a research analyst at S3 Partners, stated that short sellers, emboldened by significant declines in the sector, have continued to increase their short positions despite ongoing pressure on the stock price.
"Historically, Microsoft has behaved like a reversal stock, with short sellers covering their positions during declines. However, it is now trading like a momentum-driven distressed stock, prompting short sellers to increase their positions as the share price weakens," Gross said. Data shows that short positions in Microsoft have increased by approximately 20% over the past week.
