Dip-buyers go missing as software selloff slams stocks

• The S&P 500 software and services index fell nearly 4% on Tuesday and declined another 1% on Wednesday, marking the worst drawdown since the 2022 rate-driven selloff
• Options flow in software ETFs like IGV and ARKK remained 'overwhelmingly defensive' with traders pressing downside exposure rather than buying dips, according to Susquehanna Financial
• Microsoft was a notable exception attracting some buyers, but even there short interest increased by about 20% over the past week as shorts added positions into weakness rather than covering

Summary: Software Sector Selloff Continues Without Dip-Buyer Support

The software sector experienced its worst selloff since 2022, with traditional bargain hunters notably absent from the market. The S&P 500 software and services index fell nearly 4% on Tuesday, followed by another 1% decline on Wednesday, marking a sixth consecutive session of losses.

Key Market Dynamics:

Unlike previous tech selloffs, investors are not rushing to buy discounted software stocks. Steve Sosnick, chief strategist at Interactive Brokers, noted clients are more eager to buy dips in precious metals and semiconductors than software names.

Options trading revealed a predominantly defensive stance. Chris Murphy of Susquehanna Financial reported traders are "pressing downside exposure" in software ETFs like IGV and ARK Innovation ETF (ARKK) rather than seeking dip-buying opportunities.

Notable Exception:

Microsoft stands out as the sole bright spot, attracting buyers despite the sector's bearish sentiment. However, even Microsoft is showing unusual patterns—short interest has increased approximately 20% over the past week. Robert Gross noted Microsoft is now "trading like a momentum-driven, distressed name" with shorts increasing into weakness, contrary to its historical behavior as a reversal stock.

Market Implications:

The absence of dip-buyers signals a potential shift in investor sentiment toward the software sector, marking a departure from the typical tech rally pattern. The sustained six-session decline and defensive options positioning suggest deeper concerns about software valuations, with traders anticipating further downside rather than a quick recovery.

This represents the sector's worst drawdown since 2022's rate-driven selloff, indicating fundamental changes in how investors view software stocks.