Software: The Trade That's Fooling Everyone

The software sector of the S&P 500 has functionally been in a bare market over the last 3 months. But here is the key thing. It is the one place in the market

thing. It is the one place in the market that is most misunderstood. And I am going to break down how to think about the software sector, how it connects to equity indices, and what exactly you

should be thinking about as you're taking trades, whether it's in the index or in individual names. And I'll be breaking all of that down in this video.

If you want to go through all of the different research and videos that I'm covering every single day, you can go to capitalflows research.com. That'll be

capitalflows research.com. That'll be

linked below. There's also a special report for paid subscribers that really breaks down these factors even more. And

you'll want to understand several key points in this video to begin to frame the picture for what trades should I be taking right now. So, let's start with

the S&P 500 and the different sectors.

Here is the S&P 500 in white. And you

can see we have been in this range chopping for a pretty prolonged period of time about a month now. Now here's

the key thing. When I look at any of these moves to the upside or downside in the S&P 500 I always want to know why is that taking place. The technology sector

is one of the main waitings counts for almost 40% waiting in the S&P 500. And

in the technology sector you have right here in orange the technology sector of the S&P 500. The technology sector is broken down into two components. That's

going to be important for understanding how things are going to move over the next two weeks. The first component is hardware in blue and then the next component is software in purple right here. By the way, if you want this

here. By the way, if you want this entire slide deck to go through these charts on your own, it'll be linked below in the report and that'll be 100% free. Here is the way that you want to

free. Here is the way that you want to think about this though. When you have these changes in the index, you want to ask which sectors are falling the most and which ones are rallying the most.

When we look at the broad sector distribution right now, you have the energy sector rallying, which makes sense because crude is rising. You have

the material sector rallying as well as we have all of these knock-on effects for investment for the AI theme. And

then you have industrials showing very similar things along with consumer staples as you have some food prices rally as well. All of these sectors have been leading the way on a yearto-date

basis. Now, this begins to explain where

basis. Now, this begins to explain where capital is moving. it has moved out of information technology and into these other names and specifically in the tech

sector it has been this software section that has fallen the most. Now here's a breakdown of all of the names in the service sector or excuse me the

technology sector for software and then also in the hardware sector for technology. This is really key because

technology. This is really key because tech is always broken down into software and hardware. There's some overlap, but

and hardware. There's some overlap, but broadly speaking, on a sector basis, here are the types of things that you want to be looking for. Notice that

right here in the software section, all of these stocks are functionally in a bare market. You have on a 5-day look

bare market. You have on a 5-day look back, all of these stocks down tremendously. And then over the last 3

tremendously. And then over the last 3 months, the majority of these stocks are just absolutely getting slaughtered.

Now, here is a question you should be asking. Why is this taking place? And

asking. Why is this taking place? And

when you compare it to the hardware sector, all of the chips and changes with those chips and data centers and things along those lines, those are all up. Now, there are several factors you

up. Now, there are several factors you want to think about for why exactly is this taking place right now? The first

one is the fact that AI is beginning to create risks. The entire question is how

create risks. The entire question is how big are those risks? I don't have the same view that technology is dead like a lot of analysts are coming out and saying just because the software sector is down a little bit. That's not really

the way you want to approach things because all you're doing is chasing a price action with a narrative. What you

want to do is look at the underlying drivers and begin to ask questions and say, "Do these have persistence?" The

other day on February 3rd, you had an unveiling of Claude and it had a new plugin which created to some risks for these sectors. Now, this is probably not

these sectors. Now, this is probably not going to reverberate and cause all these companies to go bankrupt. But that's not really the question that's on the table.

The question is given all of the changes in AI and these plugins that are beginning to develop, how much of a multiple should you put on these companies if you have these new changes taking place on net? you are probably

going to have software and hardware and these new AI functions. They're going to integrate a lot more seamlessly than people think. Claude, you know, plugin

people think. Claude, you know, plugin is probably not going to put companies like Shopify or companies like into it just completely out of business. But

what you want to think about is how is that reverberating? You know, software

that reverberating? You know, software stocks, the main narrative that's out right now, especially for companies like Service Now and Oracle and things like that, is that AI is disrupting them. And

if you understand this narrative and how it is incorrect, then you can begin to understand which spots you should take some risk. Here's a key thing that I

some risk. Here's a key thing that I would say is that is there downside? A

lot of people are talking about is there downside and is software dead and all these other things. And Jensen of Nvidia, he in a recent interview talked

about how illogical it is to argue that AI depends on software tools. it or he talks about how AI depends on software tools not their replacement. So this

idea that all of these SAS companies are going to be completely destroyed because AI is coming out fundamentally misunderstands what software is and how hardware integrates into it and the guy

with all of the hardware is the one who has a perspective on how all of these things are fitting together. So even

though that is the case, what happens anyway? You have everyone beginning

anyway? You have everyone beginning talking about all of the software sector. Here's a breakdown of all of the

sector. Here's a breakdown of all of the news articles on the software sector and how they have risen in white here as you have the software sector begin to fall.

On top of that, you have positioning blowing out. This is implied all of the

blowing out. This is implied all of the IGV ETF right here in white. And then

you also have the XLK ETF that its implied volatility right here in orange.

Notice the spread. This indicates that traders are pricing a lot more risk in the IGV ETF and in the software sector relative to tech. And this is happening in price action as well where the IGV

ETF is collapsing. Now, here's the thing. I am not interested right now in

thing. I am not interested right now in buying the IGV ETF. I think that there are some companies that are going to be marginally hurt or their growth rates in their topline revenues are going to slow

a little bit because of AI. So that

means you need to know which names are going to be hurt by AI and which ones are going to be helped by AI and how is the market indiscriminately selling all of them and which ones should you pick for the rebound. That is going to be the

subject that I'm going to cover in the report below for paid subscribers. Let's

connect this to Bitcoin though because I think this is going to be really interesting. You'll notice that the

interesting. You'll notice that the software sector and Bitcoin have actually been moving in lock step. You

actually looked today, Oracle when it was making a new low, it was one of the things that was dragging down the price of Bitcoin as well. And so these different factors of how equity rotations are functioning in markets are

directly connected with all risk assets.

There's a reason why this change in the software sector has dragged down the topline index a little bit and you need to know okay when is that rotation going to begin to slow so that I can get long the index or get a better cost basis for

trading the index. And if you were a subscriber on Capital Flows Research, you know that at the beginning of the week before we you know went into all of the rotations and craziness that we have seen with the NASDAQ down now down in the day. One of the things that I said

the day. One of the things that I said was earnings function as clearing catalyst because we have a lot of earnings this week. They force

positioning to readjust around fundamental and you have a resetting of equity long short positioning sector and factor flows until the next catalyst arrives. One reason we have seen so much

arrives. One reason we have seen so much chop in the index during the earning season is that large hedge funds step in to hedge their broad beta risk in order to isolate specific fundamental bets

around individual reports. So this

dynamic combined with shifting macro conditions is why equity indices remain marginally neutral this week. This is

what I said moving into this week and we've seen exactly that with the S&P 500 and specifically the NASDAQ. It's pulled

back a little bit. There's a reason why for that, right? When you look in foresight, you can see some of these risks building. And again, if you are on

risks building. And again, if you are on the Capital Flows Research website, this is why in this period of time, you really have to pick your spots. You can

just buy the broad index, but if you buy it with a ton of leverage and you put your stops too tight, it's just not going to work. That's why one of the trades that I've been sharing on the website is this entire hyperlquid trade

and the per trade, which is a treasury company holding Hyperlquid. I laid this out in the recent report. Again, you can go on the substack and see that if you look today, hyperlquid is up and perr is

actually closing flat on the day while Bitcoin and the index is down. That

shows you something really specific. It

shows you uncorrelated returns, which begins to help you begin to see here is where capital is actually flowing. Here

is Hyperlid in green, which is actually moving up. You have software in the

moving up. You have software in the candlesticks and you have Bitcoin in blue. Now the fact that you have this

blue. Now the fact that you have this divergence shows that the buying pressure in hyperlquid and by default the treasury company purr which is the main bet that I'm taking right now when you have that take place it is an

indication that there is more buying pressure due to the fundamentals in hype and purr as opposed to the broad sell-off that's taking place in crypto and the software sector that is

reverberating into equity markets. You

want to be very careful to watch these incremental signals and know how to interpret them because they are the ones that set the stage for how these larger changes occur. And so all of these

changes occur. And so all of these factors are the things that I'm going to dig into more to begin to say what are the specific spots that you want to take in which stocks and how do you think about those stocks relative to the

rotation risk that we are seeing. That

is what I'm going to cover in the report below because the sell-off is not just software is dead and the market is you know it is actually the market repricing all of the underlying fundamentals in

these companies and the edge is not is you know really understanding how to separate the compounders from the capital destroyers inside the same draw down who can defend margins fund growth

internally and survive a higher for longer cost of capital that is actually really important if you haven't been following any of the changes in Microsoft, OpenAI, Oracle, and all these names. If you aren't following those

names. If you aren't following those names, then you don't know actually what are the risks that are on the horizon.

If all of this capex spending doesn't come to fruition, right? That's a pretty important thing to know because there's actually a scenario where if that doesn't actually come to fruition, you could have a market top. So, the key thing is winners and losers are being

sorted by positioning in this cycle and exposure to rate volatility, dependence on equity and VC funding, sensitivity to all these things. You want to map those risks and those levers and these

rotations will keep dragging on the index until you have a path of policy rates that shifts or earnings and margin expectations really shift in these crowded software names. But you're not

going to have every single name in that sector begin to rally or begin to be a winner. You're only going to have I

winner. You're only going to have I would say part of them even emerge as winners. And so the report below goes

winners. And so the report below goes over all of those risks, how they function, and how to connect them to positioning and a larger redundancy planning framework to be able to take risks. So if you are someone who is

risks. So if you are someone who is actively operating in markets, and you're trying to get your head around, okay, how does software and the connect to the index or how does it connect to my positioning, and then how should I think through maybe picking some names

there? The report below will be

there? The report below will be specifically for you. And then if you are not going to go through that report and you want to just start saying you know what let me really dig into these

macro concepts more to understand how exactly I can stay on the right side of the macro regime. The entire substack has an entire breakdown of all the playbooks for the macro regime an entire breakdown of all the book

recommendations as well and these are all on the capital flows research website in this main article on the main page. All the educational resources are

page. All the educational resources are 100% free. They're all laid out there

100% free. They're all laid out there and I will be breaking down things further in the report linked below.