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Efficiently rotating between overbought and oversold sectors, factors, or stocks is a well-established method for outperforming markets. Like any strategy, the hard part is timing, or properly estimating when a pair of sectors, factors, or stocks is about to reverse their respective trends.
Currently, there is a massive divergence between software stocks and consumer staples. Thus far in 2026, the software ETF, IGV, is down 20%, while XLP, the consumer staples ETF, is up 12%, and the S&P 500 is flat for the year. Is it time to sell staples and buy software?
To help us better appreciate the relationship and how it may trade, we share three graphics below. The two graphs on the left show that call volume in the software sector is spiking to unprecedented levels, and put volume on staples is surging too. Speculative investors or hedgers are clearly betting that the performance divergence between the two sectors will reverse.
We can use technical analysis to assess our question. The graph on the right shows the price ratio (blue) of IGV to XLP. As shown, it has declined appreciably since November. Beneath the ratio graph is a proprietary technical momentum indicator that shows IGV is very oversold relative to XLP but has not triggered a buy signal, which would suggest that a reversal in the performance divergence is likely.
Similarly, the bottom two graphs, the MACD and stochastics, also point to oversold conditions, but neither is triggering buy signals, albeit they are close. Bear in mind that, as with technical analysis of a stock or index, IGV doesn’t have to outperform XLP; it only has to stop underperforming to bring the technical gauges back toward fair value.
The Week Ahead
The economic calendar will be busy this week. Retail Sales on Tuesday will provide our first account of consumer activity after the holiday season. The following day, the BLS will release the delayed employment report originally due last Friday. Expectations are that 50k jobs were added last month. Unemployment is expected to tick up 0.1% to 4.5%.
ADP data warns that the number could be lower than consensus expectations. On Friday, the BLS will release CPI. We are very interested in seeing whether the government’s inflation data shows a similar sharp decline, as Truflation (shown below) did in January. It’s worth adding that Friday’s University of Michigan one-year inflation expectations fell from 4.00% to 3.50%.
The earnings calendar slows down markedly this week. Of note are Coca-Cola (NYSE:KO), Duke Energy (NYSE:DUK), and CVS Health (NYSE:CVS) on Tuesday, and McDonald’s (NYSE:MCD) on Wednesday. The next key earnings report will be Nvidia (NASDAQ:NVDA), which reports on February 25th.
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