MW The 'ultimate contrarian trade' is starting to pay off for investors. Why it might have more room to run.
By Frances Yue
Software stocks rip higher on Wednesday, while semiconductor names get hit
A popular contrarian trade is starting to pay off, and it might have more room to run.
One of the hottest trades in the stock market this year may be due for a reversal - at least if certain technical indicators are to be believed.
After a long stretch of sharp underperformance, software stocks may be poised to catch up to semiconductor names, as the gap between the two groups has become so extreme that it may be ripe for a reversal, Jonathan Krinsky, chief market technician at BTIG, wrote in a Wednesday note.
Some investors have approached software and semiconductors as what professionals call a "pair trade," meaning they bet on one leg to outperform the other. Recently, betting on semiconductors, while betting against software, has proved popular.
That theme was already playing out on Wednesday. The S&P 1500 software index XX:SP1500.451030, which tracks software companies within the S&P 1500, ended up 4.5%, while the PHLX Semiconductor Sector Index SOX, a chip-stocks gauge, edged up 0.2%, according to FactSet data.
While the software-to-semiconductor trade may not yet have reached its final bottom, it appears to be getting close. That could mean hard-hit software names have an edge going forward.
"We think it's poised for some violent mean reversion, with software outperforming semis [semiconductors] from here," Krinsky said in written commentary.
The divergence is evident in one closely watched gauge: the ratio of the S&P 1500 software index to the PHLX Semiconductor Sector Index recently fell 43% below its 200-day moving average, the most extreme reading on record, as shown in the chart below.
Meanwhile, the ratio itself has fallen back to levels last seen around the peak of the dot-com bubble in 2000, Krinsky said.
The setup reflects just how one-sided the trade has become. As investors crowded into chip stocks during the recent rally, software shares were left far behind, amid concerns that artificial intelligence could squeeze software profits by making it cheaper and easier for rivals to build competing products.
Krinsky also warned that the recent sharp rally in memory-chip stocks could be a caution flag for the broader market, as those companies may remain among the most vulnerable areas for a pullback. Their gains have been so extreme that a downside reversal might be overdue, he noted.
More room to run
Still, Krinsky remained cautiously optimistic about the broader market, as the S&P 500 SPX hit a record high on Wednesday, while the tech-heavy Nasdaq COMP notched its 11th straight daily gain and logged its best 11-day stretch on record.
For one, Krinsky said a market hitting a new high does not necessarily mean it is about to reverse lower. It tends to signal the rally still has room to run rather than that an immediate downturn is ahead, based on historical data.
"More often than not, strength begets strength," he wrote. "While we are certainly due for some consolidation, it's likely too soon to fade this move."
In the 24 prior cases since 2003 when the S&P 500 posted a record high after at least a two-month gap, the index gained an average of 1.31% and a median of 1.83% over the following month, and rose 79% of the time, according to Krinsky.
A long winning streak does not necessarily signal the end of a rally either. Over the past 15 years, Krinsky noted, there have been only three other instances when the Nasdaq posted winning streaks of 11 days or longer: July 2013, December 2019 and December 2020. None of those streaks marked a top for the index, although some consolidation would not be surprising here, he added.
-Frances Yue
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(END) Dow Jones Newswires
April 15, 2026 17:41 ET (21:41 GMT)
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