Playing a Sector Rotation Into Tech
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Writing in
RealMoney's
Trading Diary, Rev Shark and I have both cited the potential for a rotation shift into tech stocks.
Potential, of course, has so far been the operative word in those citations. Such a rotation will be key to any bull phase that tech stocks might or might not have, as these stocks badly need some momentum and excitement to return to them. The momentum and excitement have been exclusive to oil so far in 2005.
How bad has tech been and how good have oil and energy been this year? How about these facts:
- The Nasdaq Composite is down almost 6% in 2005.
- The Broadband HOLDRs (BDH) are down more than 17% on the year. Yes, 17% for this high-tech telecom index.
- The Oil Service HOLDRs (OIH) - Get Report are up more than 14% this year. This stale old sector that used to be boring is on fire.
Tech has nothing going for it outside the semiconductors, which -- at least before today -- had been rebounding strongly from the crushing they got to start the year. Lately I've read and heard repeatedly that tech isn't a growth engine anymore. That innovation is dead. Carrier capital expenditures will decline as a result of the merger mania among the carriers. And most of all, there just aren't any near-term catalysts for tech.
Meanwhile, oil, energy, commodities and housing have everything going for them, right? After all, demand for oil and commodities in China and India will continue to grow exponentially. And there's no more oil to tap -- wink, wink.
I wonder if it's possible that some of those dynamics might already be more than discounted in the current price of oil. With oil at $53 a barrel this morning, these stocks look like great values. The analysts still have oil priced well below the current quote. And oh, how the momentum traders love the charts on these stocks.
What an ideal situation: Value guys
and
momentum guys can love the same sector. The resulting fireworks are the 52-week highs blinking on your screen for these stocks.
The Road Ahead
Now that we've established where we are and how we got here, let's think about where we might be headed. Isn't it possible that oil will crack sometime soon? With so much growth, value and momentum money already plowed into these stocks, that means a whole lot of money
could
come out of these stocks.
Where, pray tell, would that money be headed? Maybe a lot of it will go to cash, but some of it is likely to return to tech. There are
value plays for tech investors such as
Netgear
(NTGR) - Get Report
. There are octane growth stories such as
F5 Networks
(FFIV) - Get Report
. And there are a few stocks that I think fall into -- egad -- both categories (sort of like oil stocks?!).
Tekelec
(TKLC)
is one of these.
Taking this scenario to the next step, what would happen if these stocks started moving back up? I'd expect traders suddenly to find "catalysts" to propel these stocks further. We have a Big Bad Event coming up tomorrow morning in the monthly jobs report. Nobody wants to call that a catalyst. Or how about
Intel's
(INTC) - Get Report
midquarter update next week; again, nobody cites that as a potential catalyst. They would cite them if these stocks had a bid. In other words, by the time the so-called catalysts appear, these stocks would probably already be hopping.
Don't get me wrong. I'm not sure we're even close to beginning the sector rotation out of oil and into tech stocks. But I do think that it makes sense to keep scaling into a longer stance on tech stocks in anticipation of such a move. (If I traded other sectors, I'd be looking to lighten up on them.) That's how I'm playing it. And if such a scenario did play out, I think it would be fast and furious.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Netgear to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At time of publication, the firm in which Willard is a partner was net long Netgear, F5 Networks, Tekelec, Intel and net short Broadband HOLDRs, although positions can change at any time and without notice.
Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney.
He also produces a premium product for TheStreet.com called
The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback and invites you to send it to
cwillard@thestreet.com.