Quarter-End Mark-Ups Will Lift Software Plays Yet Higher

Does it even matter if tech stocks are high right now? Earlier this morning I penned a piece about the amazing rally in software stocks, one that you can follow along in the iShares Software Index Fund (IGV - commentary - Trade Now), the ETF that corresponds to the rally in the North American software index. The fact that the group is on the move and seems overextended may not be as important as where we are in the calendar.

We have two weeks to go in this quarter, which is a remarkable recovery quarter for the market and a total bull market quarter for many software plays, including Oracle (ORCL - commentary - Trade Now), Adobe (ADBE - commentary - Trade Now), Intuit (INTU - commentary - Trade Now) and McAfee (MFE - commentary - Trade Now). The fact that they have had monster runs usually would bring out short-sellers. But there's no real catalyst right now for the decline other than valuation. There will be no reports that will send these stocks sharply lower, and I don't expect any downgrades.

But what I do expect is mark-ups and, more important, pile-ons. I think that while the market's weaker today, the big mutual fund money desperately wants to position itself in the hot stocks, and this index comprises the hottest of the hot away from mobile Internet computing. Unlike the mobile Internet, though, it is hard to see how these stocks can be more than cyclical bull stocks, and more important, it is hard to see how the world's IT departments will be able to spend enough to justify these gains.

So what to do? Rather than advise shorting them, I think there is a trading window as these stocks, which are so desperately overextended, come back to lower levels this week, setting themselves up for a quarter-end rally.

Remember, I believe this is a trade. I do not see the longer-termer greatness for a Citrix (CTXS - commentary - Trade Now) or an Intuit. Adobe's been around, and it is great for it to get recognition, but the earnings power even in a good economy doesn't justify more than something like a 21 multiple on next year's earnings -- even with its 14% growth -- because that's far, far better than what most growth stocks are getting here. McAfee has a 22 multiple on this year's earnings: steep. That's why I said I would rather sell than buy them, as the estimates must prove way too low to justify this move. I know that many feel that's the case; I need some empirical evidence of it. I don't have it yet.

But there's no avoiding the notion that buyers will come in at the end of the quarter and move these stocks back up. The momentum players can justify any multiple they want. They always have.

It will be an interesting tug of war between naked overvaluation and the need of mutual funds to own the hot ones. The former makes sense, but the latter always seems to win out even though I think that in the end it's a fool's game once we get to the last days of the quarter. I would rather sell to them than buy with them.

At the time of publication, Cramer had no positions in the stocks mentioned.

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