Once overlooked software stocks are now sought after by everyone.

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The software sector is undergoing a fierce catch-up rally, completely reversing its previous long-standing neglect by the market.

During the current artificial intelligence boom, investor attention has long been focused on semiconductors, with the software sector almost ignored. However, this pattern is changing rapidly—software stocks have posted the largest two-day excess returns relative to the S&P 500 in more than 25 years, with record-breaking inflows from retail investors and an explosion in options market trading volume. JPMorgan analyst Brian Havey notes that as the software sector surges, long funds and hedge funds are accelerating their position covering, with the "Mag 7" becoming the most convenient source of funding.

Despite the sharp rally, from a longer-term perspective, software sector positions remain at historically low levels, with both room for further gains and pressure for profit-taking; the market stands at a delicate crossroads.

Options and Retail Break Out Together—Catch-Up Rally Arrives Fiercely

Options trading volume for the software sector ETF IGV has repeatedly set records over the past two trading days. According to Goldman Sachs data, IGV’s single-day call options volume soared to 280,000 contracts on Friday, the highest single-day record ever, with the next day’s volume still high at 225,000 contracts.

Retail funds are also pouring in at an unprecedented speed. According to Vanda Research data, the single-day net retail inflow into IGV reached $46 million, about 40% higher than the previous record set in early February, marking the largest one-day retail inflow in the fund’s history.

In terms of price performance, the software sector has recently far outperformed the Philadelphia Semiconductor Index (SOX), and posted the strongest two-day excess returns relative to the S&P 500 in more than 25 years.

Short Covering and Position Rebalancing—Institutional Funds Accelerate Inflows

In a recent report, Brian Havey from JPMorgan said: "Given the rise in the software sector, I judge that long funds and hedge funds will continue rationalizing their positions, including covering shorts and reducing underweight positions. 'Mag 7' is the easiest source of funds and the quickest way to raise cash."

This view is corroborated by data from JPMorgan’s Positioning Intelligence team. The team’s data show that long-term positions in the software sector are only at the 1st historical percentile, while semiconductor sector positions are at the 97th percentile—this extreme divergence is the core driving logic for this round of catch-up rally.

Frenzy Spreads to Individual Stocks—HPE Stands Out

The recent fervor in the market has spread from sectors to individual stocks. According to Vanda Research data, Hewlett Packard Enterprise (HPE) ranked second in retail buys over the last two trading days—its first appearance on Vanda’s retail hot list. Retail buys for HPE over these two days equaled the cumulative total of the previous eleven months.

At the same time, HPE’s weekly implied volatility soared, reflecting high uncertainty in its short-term market moves.

Positions Remain Low in History, but Profit-Taking Favored Over Chasing Gains

Despite the intensity of this rally, from a broader perspective, the software sector’s gains are still just a minor blip on the long-term chart.

JPMorgan’s position data indicate that long-term holdings in the software sector remain at historic lows, theoretically leaving significant room for further catch-up gains.

However, market observers note that after a historic short squeeze and after reaching key resistance levels, the current moment is more suitable for profit realization rather than building new long positions. The software sector remains one of the most under-held areas in the market, but the pace of the short-term upswing has surpassed expectations, and the balance of risk and opportunity is quietly shifting.

Risk Warning and Disclaimer ClauseThe market carries risks, and investment must be made cautiously. This article does not constitute personal investment advice and does not take into account the individual investment objectives, financial situation, or needs of any user. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their particular situation. Investment is at your own risk. ```