Momentum Monday – Software Leaders Under Pressure

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Do corrections end when even the last standing momentum leaders break down or do they accelerate? This is the big question for September.

The market is not in love with software stocks anymore. Many of them sold off after decent earnings reports – the same reports would have led to a gap up and new all-time highs just a few months ago. Many of the software names are back below their 50-day moving average. Some are even below their 200-day moving average. This is in stark contrast with what we saw during the last correction in May when most software names build new bases above their 50-day moving average. Those rotations are a normal part of the game. No trend lasts forever and apparently valuations are starting to matter now.

Is it possible that this is just one long consolidation after monstrous moves in the past couple of years? Anything is possible. If the earnings and sales keep growing with the same space, some of those names will resume their upward trajectory. This is often how big trends behave – in phase one, growth stocks can triple and quadruple simply based on expectations about strong future earnings. In phase two, earnings catch up with expectations or expectations catch up with earnings and the stocks have a major pullback. 

The main indexes are still trading in a range. It is funny how in a range-bound market the best entries are when the indexes are down several days in a row and everyone is afraid to buy new stocks and the best exits are when the indexes are up several days in a row and everyone is eager to put more money to work. It is the nature of the market – it often acts in a counter-intuitive way to most people’s psychology.

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