Revisiting the Recession Playbook

Technology: In September I noted that the case for tech relied on too many "shoulds" and that I was underweight. Since then the sector had a couple of months of noteworthy outperformance but in the last couple of weeks the decline in tech has been much steeper. Tech, as measured by iShares DJ Technology Index Fund(IYW Quote) is down 15% vs. an 11% fall for the S&P 500 since Dec. 26.

A lot of people, both in TV interviews and in print, like technology for a slowdown. I think that is a mistake. I have been underweight and will stay underweight for the foreseeable future. I just don't think the argument for increasing tech spending holds water. We have been hearing this for a quite a while and it never materializes with any staying power.

Healthcare: This sector is kind of a no brainer. The idea is that no matter what is going on in the economy people will still take their medicine. Since Sept. 10, iShares DJ Healthcare Index Fund(IYH Quote) is up 2%, while the S&P 500 is down 9%. despite its 9% weight in Pfizer(PFE Quote), which is down 6%, Quite simply money flows into this sector when it looks like the market's cycle is turning.

Energy: Energy gives a mixed bag for a recession . There is some history for energy doing well during recessions but high oil prices are often a contributing factor to the start of a recession, which seems to trump the threat of less demand due to less economic activity.

I suggested an equal weight in September, which was correct in that the Energy Sector SPDR(XLE Quote) has down 1.7%, but it was wrong in that being overweight would have been the better position. Going forward a slight overweight is probably warranted unless the energy names you own are relatively more volatile than XLE, in which case equalweight should suffice.

Industrials: I suggested being underweight this group and I think that still applies. The Industrial Sector SPDR(XLI Quote)is down 10% from Sept. 10. Not every industrial stock will get crushed in a bear market but 30%-40% declines are common. This is just how it works. If you have a name that ends up dropping that much the chances are good it will come back during the next expansion. But if you end up holding on to a name that does endure that kind of a hit, you need to know whether the decline is a cyclical thing or a problem specific to your stock.