The Music Stops When it Stops

The latest melt-up in many key semiconductor stocks came as software stocks slumped to a glaring degree. In fact, the spread between the two segments of the Nasdaq reached such levels that bulls were pounding the table (and still may be) that an "obvious" rotation trade would soon be underway. 

Specifically, they advocated to lighten up on the semis and rotate down to beaten-down software names, seeking apparent value or at least far less extended names. 

First and foremost, I cannot blame bulls for thinking of this play, since the Nasdaq has been endlessly melting up for years now, with even last April's correction aggressively bought for another V-shaped rally to new highs. Beyond that, part of the reason why the Nasdaq has been a nonstop push higher since last spring has been the constant rotation within tech in most spots, keeping the gravy train moving higher. 

However, around last Halloween the software stocks housed in the IGV ETF began to sputter just as the sector printed new all-time highs. 

Since then, as you can see on the updated IGV daily chart, below, software has been in a strong downtrend of lower highs and lower lows, which is only now becoming apparent to many on the back of Microsoft's earnings selloff today (as well as HUBS NOW TEAM selling off aggressively, too). 

One concept we have discussed both here and with Members countless times over the years is the way in which a bifurcated market (one which transcends mere winners and losers, but gets crowded at the top and deserted elsewhere) come apart at the seams. The game of musical chairs simply ends when the music stops, which can come at any time. 

Here, the bifurcation is unraveling as one would expect, with the strongest part of the tape, semis, slowly losing upside momentum, while the weakest part of tech, software, continues its downtrend. As you might imagine, this is a bearish setup with the semis needing to hold up and piggyback the entire Nasdaq, essentially, which is likely too arduous of a task going forward.