Software stocks are showing some signs of life.
Shares of industry giants Oracle and Adobe popped early Friday on optimism around their earnings results before reversing course later in the day. The iShares Expanded Tech-Software ETF (IGV), the biggest software ETF on the market by assets, has lost more than 11% since the broader tech sell-off began on Sept. 3. Adobe and Oracle are its second and fourth-largest holdings, respectively.
Oracle’s stock hit an all-time high Friday after its Thursday evening report showed a return to growth for the $175 billion company. Its share price surged 7.5% in Monday’s premarket a day after reports that ByteDance has chose Oracle to be TikTok’s U.S. technology partner.
Adobe caught an upgrade from analysts at Cowen ahead of its earnings report next week. The firm cited several catalysts, including demand for Adobe’s cloud products as cause for the stock to climb as high as $555. Its price was $481 a share in Monday’s premarket, up 2%.
A rise to the target price could be a choppy road for Adobe, Craig Johnson, senior technical research analyst at Piper Sandler, told CNBC’s “Trading Nation” on Friday.
“I’ve got to tell you, I’m not buying the stock ahead of the quarter,” he said. “On the charts, I’m getting a negative divergence.”
While Adobe’s share price has been climbing, up 43% year to date and over 8% in the last month, its relative strength index, which tracks momentum, has been heading lower, recently making a new lower high, Johnson said.
“Typically, to us, that suggests to us that the stock is a little bit tired,” he said. “I’d be waiting for a deeper pullback, perhaps all the way back to the 200-day moving average, which suggests a poor risk-reward right now.”
As of Friday’s close, Adobe’s 200-day moving average was at $381.22. A decline to that level would mean a roughly 19% loss for the stock from Friday’s closing price of $471.35.
Steve Chiavarone, a portfolio manager, equity strategist and vice president at Federated Hermes, said software and semiconductor stocks should continue to rise over the long term.
“We’ve said all along we think we’re in a digital industrial revolution and names that are tied to cloud, names that are tied to automation, AI, remote work are all going to be beneficiaries as secular winners here,” he said in the same “Trading Nation” interview.
“Shorter term, though, we think as this economic recovery takes hold that the market strength is going to broaden and not just be concentrated in these secular winners, but spread out to more cyclical parts of the market like value stocks, small caps and international,” Chiavarone said. “So, if you like these names longer term, we think that they’re good long-term investments. Short term, we think there could be a little bit of chop.”
For those willing to ride out the volatility, Chiavarone suggested picking individual stocks over buying into exchange-traded funds such as IGV.
“The gulf between winners and losers is going to be much more significant than what it’s been in the past,” he said. “I want companies that are really compounding their cash-flow growth and not simply momentum plays that are doing well because they happen to be in a growth index.”
“We think security selection will be rewarded over just buying the ETF,” he added.