Don't Fear Technology

The sector may have burned investors mightily over the past few years, but it appears to be firming up.
Author:
Publish date:

This column was originally published on RealMoney on Aug. 28 at 11:03 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Webster's

defines flexible as "able to bend without breaking" and "adjustable to change."

Most people say they are flexible, but when it comes down to it, they are quite rigid in their beliefs and routines.

You have to accept that sectors that you have lost money in or that have been out of favor for a long time can quietly, cyclically bounce back.

I know investors who lost money in gold stocks in the 1990s and refused to see the change in character when they started to outperform last year.

These same investors will change their position and buy at the next top.

I like to keep my eye on sectors that investors despise, and the one that is despised the most right now is technology.

Many people lost their life savings in the last nasty bear market; when you mention technology, they cringe.

What these inexperienced investors fail to realize is that out-of-favor areas will come back into demand as we rotate through the business cycle.

If you are waiting for the next bull market in stocks, you will eventually need to snuggle up to technology.

If tech stocks don't lead the way, you need to be suspect of any move higher in the market.

If they break below current support, itcould mean another leg down for the entire market.

There are many subsectors in technology that are starting to show dramatic changes in earnings, especially earnings projections for next year.

Here are three areas that have recently perked up and are showing solid signs of accumulation for the first time in a good while.

The

Broadband HOLDRs

(BDH)

recently broke above its 50-day moving average on tremendous volume.

It retested the breakout level a few days later on decreasing volume, and is now starting to move back up. If it can get above $16.86, it may have a good shot at the $18-$19 area.

The

Semiconductor HOLDRs

(SMH) - Get Report

made a climax low in July, consolidated for a few weeks and then moved above the 50-day moving average on increasing volume. The index is now in the process of forming a low-level cup-and-handle pattern. A break above this level should lead to a test of resistance at $35-$36.

iShares Goldman Sachs Networking Index Fund

(IGN) - Get Report

is also forming a low-level cup-and-handle pattern as it consolidates above the 50-day moving average. If it can hold this area and make another move up, a test of the $31-$32 area is possible.

These sectors merit a watchful eye. They are setting up for a short-term trader; for the intermediate- to long-term investor, they are just movements to pay attention to.

Once they get back above their 150-day moving averages, we will take another look. These sectors could take a leadership role in the near future, and that is something we need to be very aware of.

At time of publication, Manning held none of the securities mentioned, although holdings can change at any time. 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.