Technicals suggest more upside for software

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An upbeat forecast and results from Microsoft MSFT.O have sparked a rally in its stock on Thursday, as well as in shares of other software companies and also semiconductor names.

But recent technical signs have suggested software's relative outperformance to semis "may have additional runway," according to Adam Turnquist, chief technical strategist for LPL Financial in Charlotte, North Carolina.

AI disruption concerns drove a sharp rerating in software stocks. But, he says, "better-than-feared earnings are now challenging that narrative."

"The software versus semiconductor ratio has reversed a downtrend after reaching record lows and deeply oversold conditions," he writes, using the PHLX semiconductor index .SOX and S&P 500 software & services industry group .SPLRCIS for comparison purposes.

In addition, he says, momentum for the software group, based on a "Percent Price Oscillator," has also moved into its first buy position in more than a year. That also suggests a "potential shift toward software leadership."

The semi trade has become concentrated and overbought, he says, noting that the PHLX semiconductor index more than doubled from late March through June before entering a roughly 30% drawdown over the past month.

Although the index remains up sharply for the year and long-term fundamentals are still constructive, "the recent decline highlights the risks created by elevated positioning and parabolic price action," he notes.