Rotation Excitement Continues

The second week of the new year has been no less exciting than the first week. We continue to see major rotation from sector to sector. This week the commodities continued their selloff, while technology and biotech have benefited from institutional money flow.

Apple Inc. (AAPL - commentary - Cramer's Take) kicked off the surge in technology on Tuesday by introducing the new iPhone. Over the last two days, the technology sector and stocks have enjoyed heavy buying. In fact, even the lagging semiconductor area perked up on Wednesday. This normally is very positive for the market in general. When you see high-beta areas such as technology and semiconductors start to kick in, it signals that institutions are becoming more bullish on the market and willing to add more risk to their portfolios.

The only concern I have is that the market has continued upward without having had a correction of any significance for more than seven months. This heavy buying before earnings season could be a bull trap if earnings don't meet or exceed expectations. That said, the earnings estimates for the technology sector are estimated to have one of the largest increases among all of the market sectors, according to Zacks Research.

Biotech is also expected to have a very good year, as many of the firms in the sector have drugs in late-stage trials that have blockbuster potential. Alan Farley wrote a very good column on this sector this week and highlighted some of the stronger stocks in the process.

Let's take a look:

As you can see from the Biotech HOLDRs (BBH - commentary - Cramer's Take), the stocks are starting to see some heavy accumulation. The BBH gapped up yesterday on heavy volume, moving up almost 2 1/2%. This sector dramatically underperformed the market in 2006, dropping more than 6%, so this may turn out to be an interesting area this year. You need to be aware that this index is heavily weighted to the largest stocks in the sector, such as Genentech (DNA - commentary - Cramer's Take), Amgen (AMGN - commentary - Cramer's Take), Gilead (GILD - commentary - Cramer's Take) and Biogen (BIIB - commentary - Cramer's Take). You can check out the BBH holdings on several sources, such as Yahoo! Finance, the Amex Web site and etfconnect.com.

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The SPDRs Select Technology (XLK - commentary - Cramer's Take) ETF had a nice breakout yesterday from its two-month base, moving up more than 1%. There has been heavy institutional buying in this index since the beginning of the year, and yesterday it set a new four-year high. If the market holds together and the sector rotation continues, this may be a good trade. I would keep a close stop under the $23.00 support area.

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The Semiconductor HOLDRs (SMH - commentary - Cramer's Take) has been trading between $33 and $36 over the last four months. This is another area that dramatically underperformed the market in 2006. For a sustained bull run to continue, it will be important for them to start participating. On Wednesday and Thursday, the shares saw a marked increase in institutional buying. The SMH is still within its base, but it looks like it might be ready to make a move higher. It still has to do some work to get through the resistance levels above, but it may be worth a look. A logical place for a protective stop would be under the $33 area.

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Again, I am concerned that we are entering the earnings season with overly optimistic expectations. However, my trading philosophy says you follow price and volume first, so as we continue to get that, you have to stay the course. The important ingredient is that you keep protective sell stops close, take good profits when you get them and hedge some of your long-term holdings.

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At time of publication, Manning held no positions in the stocks mentioned, although holdings can change at any time.

Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.