Dip-Buyers Absent as Software Sector Selloff Intensifies, Marking Sixth Consecutive Down Session

The technology sector emerged as the second-worst performer among S&P sectors on February 4, 2026, declining -2.57% compared to defensive sectors that posted gains, with Basic Materials rising +1.48% and Consumer Defensive advancing +0.57% [0]. The NASDAQ’s 1.64% decline reflects the technology-weighted composition of the index and the significant weight of software stocks within the broader tech complex [0]. The S&P 500 closed at 6,870.34 (-0.78%), while the Russell 2000 fell -2.10%, indicating broad-based weakness across market capitalizations [0].

The software sector’s consecutive six-session decline represents a notable departure from historical patterns where dip-buyers would emerge to support prices during tech selloffs [1]. The iShares Expanded Tech-Software Sector ETF (IGV) fell 3%, while the ARK Innovation ETF (ARKK) declined nearly 7%, demonstrating the breadth of weakness across software-focused investment vehicles [1].

Microsoft (MSFT) has emerged as a focal point of the software sector distress, with shares declining approximately 15% since the company’s earnings report on January 28, 2026 [1]. The stock is currently trading at $416.95, which positions it significantly below its 200-day moving average of $486.57, indicating a sustained downtrend that has violated key technical support levels [0]. On Wednesday, however, Microsoft demonstrated relative resilience, rising approximately 1% even as broader software indices continued declining [1].

The most striking development involves the shift in Microsoft’s behavioral pattern among market participants. According to Leon Gross of S3 Partners, “Historically Microsoft behaves like a reversal stock, with shorts covering on the way down. Now it is trading like a momentum-driven, distressed name, with shorts increasing into weakness” [1]. Short interest in Microsoft has increased approximately 20% over the past week, signaling growing bearish conviction among short sellers [1].

The absence of dip-buying in software represents a meaningful change in market dynamics that distinguishes this selloff from previous tech routs. Steve Sosnick, Chief Strategist at Interactive Brokers, observed: “Our customers have not been as eager to buy dips in software as they are for precious metals and semis. While it’s possible that our clients are buying dips in software, it is by no means in the forefront of their activity” [1]. This statement indicates that capital flows are redirecting toward other sectors while software remains out of favor.

Chris Murphy, Co-Head of Derivative Strategy at Susquehanna Financial, provided additional context on options market behavior: “Software continues to trade heavy, and the options flow remains overwhelmingly defensive… In IGV and ARKK we’ve seen traders pressing downside exposure rather than stepping in with dip-buying interest” [1]. The predominance of defensive positioning in options markets suggests that market participants anticipate further downside and are primarily seeking protection rather than speculative upside positions.

The current software selloff disrupts a long-standing market pattern where dip-buyers would emerge to rescue tech routs, particularly in high-growth segments. This behavioral shift suggests either a fundamental reassessment of AI-related growth expectations among investors or a capitulation event where previous dip-buyers have exhausted their buying capacity [1]. The contrast with other sectors—where dip-buying remains active—is particularly telling, as it indicates that investors are making sector allocation decisions based on fundamental concerns specific to software rather than exhibiting generalized risk aversion.

Microsoft’s transformation from a “reversal stock” to a “momentum-driven, distressed name” represents a significant technical and behavioral change [1]. The 20% increase in short interest over the past week contradicts the stock’s historical pattern where short sellers would cover positions during declines, providing technical support [1]. This shift suggests that institutional traders and sophisticated participants have fundamentally revised their outlook on the company’s prospects, potentially related to AI monetization challenges or competitive pressures.

The defensive positioning in software-related options and the redirection of dip-buying interest toward precious metals and semiconductors creates a self-reinforcing negative feedback loop [1]. As dip-buyers avoid software, prices decline further, which discourages potential buyers and attracts additional short selling, amplifying the downward momentum [1].

The absence of dip-buying support represents the most significant risk factor, as historical patterns indicate that sectors lacking this support typically experience extended drawdown periods before sustainable rebounds occur [1]. The defensive options positioning and increasing short interest into weakness suggest that technical selling pressure may persist until fundamentals stabilize or valuations become compelling enough to attract institutional buyers [1]. The breach of Microsoft’s 200-day moving average and sustained trading below this key technical level indicates that the downtrend remains intact [0].

Despite the challenging technical conditions, several potential opportunity indicators merit monitoring. Microsoft’s relative strength on Wednesday, rising approximately 1% while the broader sector declined, could signal the early stages of a bottoming process [1]. Additionally, if valuations decline to historically attractive levels, the absence of current dip-buyers suggests that any future re-entry could generate significant returns as other investors follow [1]. The current situation creates potential for contrarian investors with longer time horizons, though timing remains challenging given the absence of clear technical support levels [0].

Market participants should monitor short interest levels for signs of contraction, which would indicate that short sellers are beginning to cover positions [1]. Institutional buying interest represents the key reversal signal that could mark the end of the current downtrend [1]. Additionally, developments related to AI disruption fears and enterprise spending data will be critical indicators for assessing whether the fundamental concerns driving the selloff are subsiding or intensifying [1].

The software sector’s deepening selloff on February 4, 2026, reflects a significant behavioral shift among market participants, with dip-buyers conspicuously absent despite six consecutive sessions of losses [1]. The technology sector’s -2.57% decline underperformed defensive sectors significantly, while Microsoft traded 14% below its 200-day moving average [0]. Short sellers are increasingly active into weakness—a departure from historical reversal patterns—while options flow remains overwhelmingly defensive [1]. The current market dynamics suggest that technical selling pressure may persist until fundamentals stabilize or valuations reach compelling levels that attract institutional buyers [1].