Believe the Bounce?
Over the past two months markets have been on quite a ride, although you wouldn’t know it by looking at broad index returns. Since mid-December, the S&P 500 is up 1%, while software stocks and bitcoin are down 24% and 27%, respectively. That’s a big spread, and was even more dramatic before the recent bounce in some of the washed-out pockets.
As we watch markets try to find solid footing this week, the main questions are what’s driving the divergence and is it over?
Value seekers are drooling over the bear market-level correction in the software industry group and other stocks within the Information Technology sector, while others are concerned that the AI trade may have lost momentum.
There’s validity to both of these ideas, but I land closer to the value-seeking bunch.
How Low Can it Go?
A few beliefs I hold strongly as an investor:
- Markets tend to overshoot on the upside and the downside in the short-term.
- Buying is hard to do when you’re scared, but you should do it anyway.
- Bottoming is a process, not a one-time event.
It’s uncomfortable to watch when an investment goes down quickly and by a large magnitude, but that can also signal that markets have overshot and are poised for rebound. Technical indicators can help us gauge the severity of a drawdown and/or likelihood of a recovery.
Software and bitcoin’s recent drawdowns show us that both entered oversold territory as measured by relative strength indices (RSI) around the beginning of February. For reference, an RSI <30 signals “oversold,” while an RSI >70 signals “overbought.” Not only did both of these investments drop below 30 RSI, but they did so in swift and dramatic fashion.
To add insult to injury, if we broaden out the lens to look at the performance of the Growth factor broadly, it’s been in a downtrend since the middle of 2025 and had a more violent drop in the few months. This paved the way for value stocks to outperform growth stocks, and pushed investors into sectors such as Energy, Materials, Consumer Staples, and Industrials.
The collapse in the Growth factor is a big part of why investors have gotten so nervous. AI-related stocks are the dominant players in that theme and have not performed well relative to other parts of the market recently. Given how dependent we are on optimism and sentiment surrounding AI, this is a disconcerting change.
The good news is growth stocks seem to have passed the baton to other parts of the market that are stepping up and pulling their weight. The other good news is that if some of these beaten down pockets looked too expensive before, they’re considerably cheaper now. Like I said: Buying is hard to do when you’re scared. Do it anyway.
Momentum Changes Are Not Thesis Busters
The majority of this volatility has been driven by sentiment, not fundamentals. These businesses did not broadly report a contraction in revenue, earnings, or profits. The AI theme is still alive and well, as evidenced by several mega-cap tech companies announcing an increase in capital expenditure expectations in recent weeks.
As AI moves to new phases in its lifecycle, there are inevitably going to be new disruptions that will force companies to adapt and move faster in order to stay relevant. Not every company will benefit – there will be some that lose and die off in this race. But it is not likely to wipe out an entire industry (such as software) in one fell swoop.
Although sentiment can be powerful and momentum can shift quickly, it is also dominated by emotion. Investors who can keep a handle on their emotions during periods like this are positioned better to pounce on opportunities.
Want more insights from Liz? The Important Part: Investing With Liz Thomas, a podcast from SoFi, takes listeners through today’s top-of-mind themes in investing and breaks them down into digestible and actionable pieces.
photo credit: iStock/MicroStockHub
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