As artificial intelligence continues to fuel significant volatility in the technology sector, investors are turning to the options market to manage risk and identify opportunities. The market has experienced a notable rotation, with a major divergence emerging between hardware and software stocks. While hardware, particularly semiconductor companies, has seen explosive growth, many software names have struggled significantly this year.
This divergence became pronounced in the second half of last year, with hardware outperforming software by nearly 18%. That trend has accelerated dramatically this year, with the performance gap widening to over 20%. This has led to strong bullish activity in chipmakers, while several major software companies have seen their stock prices decline.
The semiconductor sector, as tracked by its leading ETF, is already up nearly 20% this year and an astounding 80% over the past 12 months. This surge is partly justified by the fact that, just 18 to 24 months ago, many of these chip companies were considered cyclical and were relatively inexpensive compared to the broader market, before becoming central to the AI investment theme.
Despite the recent shellacking of the software sector, there are tentative signs of a potential shift. The software ETF recently saw a day of strong performance, with call option volume significantly outpacing puts. This bullish options flow was also observed in some of the sector’s worst-performing individual stocks. While it’s too early to declare the downturn over based on just a couple of days of relative outperformance, it suggests that some investors are betting the worst may be behind for these battered software names.
