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Don’t let today’s software rally improve your mood

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Close-up of the bold term DEAD CAT BOUNCE
Image Credits: RapidEye (opens in a new window) / Getty Images

After a rough year in the public markets, you might take today’s brilliant trading as good news. Any positive price movement is a win, right? Kinda.

The tech-heavy Nasdaq composite index rose 3.4% today, while other major U.S. indices jumped smaller amounts in a hall-of-fame start to the trading week. (That the markets are turning up for Disrupt is rather kind, I must admit.) Even more important to the tech industry, however, is sector-specific news.

Observe:

Good news? Sure, but only if you are into squashy cats.

Let me explain. When the value of a particular commodity or security falls sharply, it often follows up its declines by bouncing back a little. If the underlying forces that drove the security negative remain in place, such rebounds often prove short-lived and not indicative of the actual “bottom” of any particular trading range. This is often called, somewhat inartfully, a “dead cat bounce,” or more specifically, the sort of modest rebound that a cat’s corpse might manage if it hit concrete after falling from a high window.

How does the dead-cat concept impact today’s rally in the value of tech companies generally and software and fintech concerns more specifically? It’s hard to call today’s stock market results anything other than a fatal feline ricochet, as the value of both sets of companies in question have fallen so low that we would need multiple days like today in a row to claw back even a fraction of their lost ground.

You are welcome to celebrate the day’s strong trading, just don’t take it as anything more than that: one day’s market enthusiasm. If we get another day in a row of similar gains, we might raise an eyebrow. A third and we might be so bold as to say that a trend is forming.

That likely won’t happen. The main forces that brought the value of tech stocks down in recent quarters are still in force today, and are in fact set to become all the more strict in coming months as central banks are generally expected to continue raising interest rates. Furthermore, the geopolitical tensions that are spilling over into the technology landscape are not set resolve anytime soon, if ever.

Why software valuations could drop more if things don’t change soon

Let me put this into numbers. At its peak, the Bessemer cloud index’s ETF traded as high as 65.51 points during the closing months of 2021. Today, after its gains, the same basket of companies is worth 25.66 points. Sure, a 1.41-point recovery today is Big News in percentage terms, but when we consider how far things remain depressed from highs, such gains are little more than a ray of sunshine when there’s still ample snow and ice on the ground.

It is very easy to get caught up in near-term market movements and read too much into them. So long as technology valuation multiples remain depressed — and today’s share price movement won’t provide more than a nudge when it comes to unwinding recent losses — nothing changes in venture land. It will still be more difficult to raise, defending prior valuations will be incredibly difficult, and 2021-scale losses will remain out of fashion.

Our notes on the issues facing the IPO market and unicorns remain in force.

It would be more fun to be more positive about the day’s trading. But there’s little reason to lie to ourselves. Don’t cheer the dead cat; it’s not about to take flight.

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