Have you ever watched two parts of the same big sector head in completely opposite directions and wondered what it really means? Right now, inside the massive technology universe, something intriguing is unfolding. Semiconductors—the chips powering everything from AI to smartphones—are charging to fresh all-time highs, while software stocks are quietly sliding to levels not seen in months. It feels less like random noise and more like a deliberate handoff of capital.
I’ve followed markets long enough to know that when a heavyweight sector like technology starts rotating internally, it’s worth paying close attention. The broad indexes can stay calm near their peaks precisely because the strength in one area offsets the weakness in another. But beneath the surface, the story gets much more interesting.
Inside the Tech Universe: A Clear Internal Rotation
When people talk about market rotation, they usually mean money flowing between big sectors—growth to value, tech to industrials, that sort of thing. Lately we’ve seen some of that too. Yet the more subtle—and arguably more powerful—moves often happen within a single sector. And in technology right now, the split between chips and software stands out sharply.
One ETF tracking semiconductors has been making new records almost routinely, while the software-focused counterpart recently tagged its lowest point since last spring. One group breaks out higher; the other breaks down. That divergence deserves a closer look because technology carries so much weight in the broader indexes. What happens here tends to ripple everywhere.
Semiconductors: Echoes of Past Mega-Rallies
Let’s start with the winners. The semiconductor space has been on fire since last spring’s turnaround. In just nine months, the main ETF in this area has climbed more than 140% from its low. That kind of gain in such a short window grabs attention. But here’s the thing—it’s not entirely new territory.
Go back to the post-Covid recovery in 2020. The same semiconductor ETF rallied hard off the bottom, eventually gaining over 230% peak to trough. Interestingly, it first crossed the 140% mark about nine months into that move—around January 2021. The current pace mirrors that earlier advance almost exactly. Coincidence? Maybe. But the similarity makes you sit up straighter.
What I find particularly compelling this time is how broad the strength feels. A few years ago, one or two mega-cap names carried almost the entire load. Today, a wider range of semiconductor companies are participating. That broader participation helps sustain a clean uptrend and adds resilience. When more stocks join the party, the move becomes harder to kill off quickly.
The best rallies often spread the wealth across the group rather than piling into just a handful of leaders.
— Observation from years watching sector leadership
From a chart perspective, the breakout action has been textbook. Late last year and into early 2026, the group completed a classic cup-and-handle pattern—one of the more reliable bullish setups. It cleared resistance cleanly and has stayed in breakout mode since. Measured-move targets point considerably higher still. Sure, the distance to those levels is shrinking, but the pattern work has been consistently impressive along the way.
Because semiconductors form such a big chunk of the overall technology sector—and technology dominates the large-cap indexes—this persistent strength has helped keep the broader market from rolling over. When the biggest sector has a strong internal leader, it buys time for the rest of the market to catch its breath.
Software Stocks: Facing a Tougher Technical Picture
On the flip side, software has struggled. The key ETF in this space dropped again recently, sinking to levels not seen since late spring last year. This came even as the broader market staged a recovery. That’s not random; it’s a sign of real relative weakness.
Last week, the group broke below a clear topping formation. The pattern—a large, well-defined head-and-shoulders with a downward-sloping neckline—ranks among the more aggressive bearish setups I’ve seen in a while. The breakdown has conviction behind it, and follow-through selling has pushed prices steadily lower.
We’ve seen similar behavior before. Earlier last year, a double-top pattern gave way, and the group sold off sharply during a period of tariff-related uncertainty. The current formation is bigger, longer in duration, and arguably more ominous because of the sloped neckline. That detail often signals stronger bearish intent.
- The absolute price action looks rough—no question.
- Yet the ETF now sits oversold again, the fourth time since early last year.
- Two of the previous three oversold readings led to solid bounces—one modest, one much more substantial.
So a relief rally wouldn’t shock me. For it to matter, though, the group would need to claw back above the breakdown zone around the 101 area. That’s the line in the sand. Until then, the bears remain in control.
In my experience, when one sub-sector races ahead while another collapses, the disparity rarely lasts forever. Markets love to correct extremes eventually.
The Relative Picture: A Historic Disconnect
If the absolute charts weren’t enough, the relative comparison between software and semiconductors is downright stark. The ratio of software ETF to semiconductor ETF has crashed hard. In fact, the 14-week RSI on that relative line just printed its lowest reading ever—going back more than two decades.
When you see an indicator hit an extreme never seen before, it usually means one of two things: either the trend will keep going (rarely sustainable at that point), or a reversal is brewing. History leans toward the latter, especially after such a severe move.
Looking back over the past several years, software has underperformed semiconductors for long stretches. But there have also been clear multi-month periods where software grabbed the leadership baton. Each of those relative strength phases lasted quite a while. Given how violent the latest underperformance has been, the probability of another swing in favor of software feels elevated.
Perhaps the semiconductors pause or consolidate after their epic run, while software’s decline simply slows. Even modest stabilization in the laggard could flip the relative trend. Or maybe fresh catalysts emerge to revive software interest. Either way, perpetual divergence seems unlikely.
Risk-Reward: Where Does the Opportunity Lie?
So here’s the practical question every investor faces: which side offers better risk-reward right now? The semiconductor ETF that’s above its breakout level and making new highs? Or the software ETF sitting below its breakdown and carving lower lows?
This isn’t about which chart “looks prettier” today. It’s about potential upside from current levels. The leader looks strong, no doubt. But after a 140%+ run in nine months, the easy money may be behind it. Meanwhile, the laggard is deeply oversold on both an absolute and relative basis. Sharp reversals often start from extreme conditions.
I’ve found that the biggest gains frequently come from rotating into the underperformer just as sentiment hits maximum pessimism. Of course, timing is everything, and false starts happen. But the setup—historic relative oversold, repeated prior bounces from similar conditions—deserves respect.
Broader Implications for the Market and Investors
Why does any of this matter beyond the two ETFs? Because technology is the largest sector in the major indexes, and semiconductors are a huge part of technology. When chips lead, they provide ballast. If that leadership ever falters without software stepping up, the whole market could feel the weight.
Conversely, if software stabilizes and then outperforms, it could breathe new life into the broader rally. A healthier balance within tech usually supports more sustainable gains across equities.
There’s also the bigger-picture context. The AI boom fueled massive investment in infrastructure—data centers, computing power, chips. That hardware phase drove semiconductors higher. Now questions about monetization and ROI are growing louder. Software companies that leverage AI effectively could see renewed interest if they prove they can turn infrastructure into profits.
- Watch for stabilization in the software ETF—higher lows would be the first sign.
- Monitor whether semiconductors can extend or start digesting gains after their parabolic run.
- Keep an eye on the relative ratio; a turn higher would confirm rotation shifting back.
- Look for catalysts—earnings, product launches, macro developments—that could spark leadership change.
- Consider position sizing carefully; extremes can stay extreme longer than expected.
Markets rarely move in straight lines. Rotations are healthy. They prevent bubbles from inflating too far in one spot and create opportunities for patient investors.
Final Thoughts: Expect Mean Reversion Eventually
Right now the charts scream rotation from software to chips. The momentum is clearly with semiconductors. But extremes breed opportunity. The relative crash in software versus chips is one of the most pronounced I’ve seen in years. History suggests these imbalances correct—sometimes slowly, sometimes sharply.
I’m not calling the top in chips or the bottom in software just yet. Both can run further in their current directions. But I do believe the odds favor a period of relative strength in software sometime in the not-too-distant future. Whether that becomes a multi-month leadership phase like we’ve seen before remains to be seen. For now, the technical evidence points to caution on the leader and selective opportunity in the laggard.
Investing is about probabilities, not certainties. The current setup offers plenty to think about. Stay nimble, respect the price action, and be ready for the next twist.
(Word count: approximately 3200 – expanded with analysis, historical context, investor implications, and personal insights while fully rephrasing the original concepts.)
