Why These Software Stocks Could Be On the Move

A number of sectors are helping to lead the Nasdaq Composite (COMP) higher today. Among the outperformers are software stocks, with the iShares North American Tech-Software ETF (NYSEARCA:IGV) tacking on 0.8% to trade at $93.13. However, from a longer-term perspective, this sector may actually be vulnerable to future headwinds.

Of the 40 software names we follow at Schaeffer's, just 10% are currently trading above their 80-day moving average. Also, despite the fact that the average stock is down close to 3% year-to-date, 62% of covering analysts have handed out "buy" ratings. In other words, as a whole, the sector may be negatively impacted by an unwinding of optimism.

Among the most overhyped equities is VASCO Data Security International, Inc. (NASDAQ:VDSI), which is one of the worst-performing software stocks we track. The shares are up 0.1% at $15.70, but still face a year-to-date deficit of nearly 45%. Nonetheless, both of the analysts covering VDSI consider it a "buy" or better, and its consensus 12-month price target of $34 more than doubles current levels. Long story short, downgrades and/or price-target cuts are a real possibility.

Along similar lines, SouFun Holdings Ltd (NYSE:SFUN) is a historic underperformer -- shedding 22% year-to-date at $5.75, even after accounting for today's 5.5% explosion. Yet, five brokerage firms rate the shares a "strong buy," compared to just one "hold" and not a single "sell" -- potentially setting the stage for downgrades.

But not everything is "gloom and doom" within the sector. Microsoft Corporation (NASDAQ:MSFT) has added 2.9% this afternoon to hover near $43.02, after recently bouncing from its 32-month moving average -- which roughly corresponds with the round-number $40 level. In other words, the stock could benefit from double-barreled technical support.

What's more, 10 of 24 analysts have handed out "hold" or worse assessments on MSFT. Should the shares sustain their comeback, a capitulation among these skeptics could spell upside for Microsoft Corporation.