What's Wrong With Tech?

It's not impossible for the stock market as a whole to go up if technology stocks don't. But it sure is hard for a short-term stock rally to turn into an honest-to-goodness bull market without the sector of Cisco(CSCO Quote), Intel(INTC Quote) and Microsoft(MSFT Quote) leading the way.

That's especially true if the financial sector, that other great bull-market leader, is struggling under the weight of more-than-expected interest rate increases from the Federal Reserve.

So even if you don't own a single technology share, you'll want to know the odds that technology stocks will get it together and take on the role of bull-market leader that the sector so often assumed in the 1990s.

Here are two possible outcomes:

If tech stocks do lead the market, the pattern -- if not the absolute magnitude of the gains -- will look like 2003, when the technology-heavy Nasdaq Composite returned 50% and the Standard & Poor's 500 Index returned 26.4%.

If tech stocks continue to show only periods of modest gains separated by steep declines, then 2006 will look like a replay of 2004 or 2005, when the Nasdaq returned 8.6% and 1.4%, respectively, compared with 31.8% and 47% for the Philadelphia Oil Service Sector Index (OSX). (The S&P 500 returned 9% and 3%, respectively.)

Unfortunately, the odds of technology stocks continuing to struggle in 2006 are pretty high. If that's true, investors such as you and I need to search for the sectors or sector that will outperform the market if we're looking for anything more than modest returns.

Analyzing why technology stocks are likely to struggle again in 2006 also suggests a strategy for the years ahead. I'll follow up what is a fairly pessimistic analysis of the near-term prospects for the sector with, in my next column, a way to patiently invest now for the better returns that are due closer to the end of the decade. And I'll give you three stock picks for doing just that.