Charts point to rotation to chips from software inside the technology universe
When we hear the termmarket rotation, we typically think of money movingbetweensectors — mostly from growth to non-growth. This has been happening over the past several weeks and has beena key reason the S & P 500 has remained near its highs. However, rotation also occurswithinsectors, and when that happens in a heavyweight group liketechnology, it deserves attention. This has been a prominent theme for several months, particularly between two areas moving in opposite directions. Just Thursday morning, the VanEck Semiconductor ETF (SMH) made another new all-time high, while the IGV software ETF fell to its lowest level since late April 2025 on Wednesday, bucking the broad market’s recovery. One is breaking out; the other is breaking down. The divergence is most prominent in the most important groups, which we’ll break down in detail:. Semiconductors look like 2020-2021 First,let’s start withSMH, which has been a leader from the very beginning of the turnaround last April. It is currentlyup over 140% from that low, which has occurred over just nine months. Incredible … but not unprecedented. SMH’s advance is very similar to what we saw off the2020 Covid lows, which ultimately extended well into late 2021, when SMH was up more than230%trough to peak. The advance first hit 140% in January 2021 … nine months into the move. So far, the pace of the latest rally has been exactly the same. Again, incredible. Semiconductors: Late pattern breakout SMH has done an excellent job not only rallying, but repeatedlyleveraging bullish patterns, and that trend has continued into 2026. As 2025 ended and 2026 began, SMH broke out from acup-and-handle formation, and it remains firmly in breakout mode with anupside target near 435. While that level is not far away now, it represents just one of several large bullish patterns the ETF has successfully leveraged along the way. One key difference this time is that the move hasnot been driven solely by Nvidia (NVDA) . Instead, a broader group of semiconductor stocks has been carrying the weight, helping keep SMH in a well-defined uptrend. Given that semiconductors are adisproportionately large piece of technology, and technology itself is thelargest sector in the S & P 500, this persistent strength has been a major reason the broad-market index has been able tomaintain its footing near the recent highs. Software: Bearish pattern remains The same has certainly has not been the case with software stocks. The iShares Expanded Tech-Software Sector ETF (IGV) fell again on Wednesday, continuing to drop after breaking below avery clear topping pattern last week. We’ve seen this before, too. The IGV ETF broke below a double top formation in early 2025 and subsequently collapsed during the Tariff Tantrum in April. The currentbearish head-and-shoulders patternis larger, longer in duration and has a downward-sloping neckline, making it one of the most aggressive bearish setups currently in play. More positively, IGV is nowoversold again, marking the fourth such instance since last March.Two of the last three times, this condition led to clear bounces — April and November 2025 — with the former producing significantly more upside. From this angle, another rally attempt wouldn’t be a surprise. For any move to be meaningful, IGV would need toreclaim its breakdown zonenear the 101 level. The key question is how much worse can it get with areas like semiconductors pushing to new all-time highs. IGV vs. SMH: Most oversold ever So, which ETF gives us abetter risk-rewardat this stage? The leading SMH ETF,which continues to stay above its breakout zone and make new highs?Or IGV, which continues to sit below its breakdown zone and make lower lows? Note — thisisn’t about which chartlooksbetter. The question is, which couldgainthemost from here? That brings us to the IGV versus SMH relative chart. And if the IGV absolute chart looked bad, the IGV/SMH ratio looks like an outright crash. In fact, the14-week RSI of the relative ratio just hit 15, thelowest reading ever, following Wednesday’s move. (IGV began trading in 2001.) IGV vs. SMH: Odds of a relative bounce The underperformance could certainly continue over the longer term, butlikely not at this pace. Why? One possibility is thatSMH eventually stallswhile IGV’s decline simply slows, which would help stabilize — and potentially turn — the relative-strength trend. Whatever the scenario, one thing is clear:We do not expect IGV and SMH to continue moving in opposite directions for much longer. Potential mean-reverting relative move Here’s a close-up view of the relative chart going back to 2020. IGV has underperformed for most of that period, but there have beenfour prior instanceswhen software postedseveral months of relative strength versus SMH. Each of those phases lasted many months. Given theseverity of the latest down move, the odds suggest another bounce in software — both on an absolute and on a relative basis — could develop again in the near future. If and when that happens, the next step will be seeing if IGV can eventually form a bullish chart pattern.That has been a missing ingredient for quite some time. — Frank Cappelleri Founder: https://cappthesis.com DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. 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