The recovery in semiconductor shares ($DJUSSC) last week, in my opinion, was quite weak. Much of the strength occurred by 10am ET, and the balance of the days really didn’t see much progress back to the upside. Accordingly, I’d call the rebound more market maker manipulation than anything else. I believe we’re going to see a difficult period for the semiconductors for awhile and, make no mistake about it, I’ve been VERY bullish semiconductors in 2024 thus far.
I do see a further rise ahead for U.S. equities, but if semiconductors, which account for 11% of the S&P 500 and 25% of the NASDAQ, don’t perform as well in the second half of the year, what areas might pick up the slack and lead our market higher?
Software
We just saw a solid quarterly earnings report from Adobe Systems (ADBE) and the stock exploded higher, gaining more than 20% since that report two weeks ago. Overall, however, software had been lagging on a relative basis. In fact, its relative performance over the past 6 months (1st half of 2024) hasn’t been exciting at all:
Over the past two weeks, though, the character of the software chart has changed. We’ve seen an absolute price breakout above a period of consolidation that’s lasted for months. Note, in the bottom panel, that software also broke its relative down channel. In other words, its 5-month period of underperforming appears to have ended.
You should also be aware that software stocks have the tendency to outperform during the first month of all calendar quarters. I’ll summarize that in a moment, but first here’s the visual seasonality chart:
And here’s the summary of how quarterly performance breaks down for the group:
Month 1 (January, April, July, October): +8.8%Month 2 (February, May, August, November): +3.5%Month 3 (March, June, September, December): +3.0%
It’s also worth noting that July (+2.6%) is the 2nd best calendar month of the year for software, trailing only October (+3.1%). The fact that software just broke out after a lengthy basing period only adds to the bullishness here.
To drive home this seasonality point even further, consider that since this secular bull market began in 2013, software has risen EVERY YEAR during July and its average July return has been 3.7%. It’s very easy to get behind the software space right now.
One final point about software’s leadership during the current secular bull market. While it hasn’t really been a great leader the past few years as relative strength vs. the S&P 500 has been going up, then down, the long-term relative picture is quite different. Check out how strong software has been, at times, leading the secular bull market advance:
From 2015 through part of 2020, software not only soared on an absolute price basis, but check out its relative strength. This is one of those industry groups that can scream higher on a relative basis as well, and I believe we could be starting one of those periods. The $DJUSSW:$SPX ratio is almost exactly where it was in mid-2020. We’ve seen no “net” leadership over the past 3 years. I do expect that to change and the recent price breakout may have just sparked the group.
During my Weekly Market Recap video, I discuss software at length and highlight several key software stocks worth considering for a big second half run. Simply click on the link for this week’s show, “Here’s Why Software Will EXPLODE In The 2nd Half of 2024” and feel free to leave me a comment. Also, please be sure to hit the “Like” button and “Subscribe” to our YouTube channel while you’re there.
I will also be highlighting a software stock in my FREE EB Digest newsletter on Monday. If you’re not already a free subscriber, CLICK HERE and sign up with your name and email address. You don’t need a credit card and you may unsubscribe at any time.
Thanks so much for your support!
Happy trading!
Tom