While markets sit near all-time highs, massive rotations have created wide dispersion…especially in technology stocks. But history and evidence suggest that now is a great time to buy beaten-down software stocks, suggests Lucas Downey, co-founder of MoneyFlows.
Software companies have been doomed. As Artificial Intelligence (AI) continues to make productivity advancements, investors have discounted the group substantially. In fact, we are witnessing some of the largest outflows in the sector…ever.
To give you an idea of the magnitude of the software selloff, the iShares Expanded Tech-Software Sector ETF (IGV) has plunged 28% since November. This fund holds a basket of the largest tech stocks on the planet, including Microsoft Corp. (MSFT) and Palantir Technologies Inc. (PLTR).
Programmatic forced selling has hit the group extremely hard. This brings us to our signal study. The widely followed Relative Strength Index (RSI), which measures technical momentum, fell to 14.16 on Feb. 5. This is the lowest reading going back decades.
Normally, you don’t want to catch a falling knife. However, forced-selling events present a rare oversold signal. I went back and found that the IGV ETF has measured an RSI of 17 or lower just six times in history, including the tech routs in 2001 and 2006.
Here’s what happened next:
- One week later, software stocks fell 1.8% on average
- But one month later, they jumped 12.1%
- Three months later, they ramped 35.2%
- Six months later, they soared 31.2%
Now, should you definitely expect these types of gains in 2026? No. But the evidence points to better days ahead…and I personally agree. Top-tier software stocks will thrive again.
Just make sure you bet on the best names loved by institutional investors. Bet on the outliers. That’s where our process shines year after year.
