Cyclical Rally Causes Grief for Mutual Funds

Plus, Cramer welcomes Adam Lashinsky to <I>TheStreet.com</I>.
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This cyclical rally must be dreaded in the halls of mutual fund-dom.

The major mutual funds have been caught flatfooted in their tech and health-care stocks at precisely the point when the

Alcoas

(AA) - Get Report

and

Phelps Dodges

(PD) - Get Report

are exploding to the upside. They are loaded to the gills with stuff that just doesn't move any longer -- or worse, trades in a range just like the cyclicals did for many years.

In fact, for traders, tech is still the place to be. It trades up; it trades down. Its volatility is still extremely high. It's just that in the end it goes nowhere, which is dreadful for 100% long mutual funds dedicated to this area.

For some funds, particularly those dedicated to being 100% long in their core competencies (which are invariably tech or health care), we are seeing the largest divergence between the averages and these funds since 1990. These funds have no place to hide. They can only hope that the cyclical rally ends -- slinks back to where it came from. They are getting killed and will keep getting killed as long as the cyclicals rule.

I think we are still early in the rally, as we have only had one quarter of strong earnings, and even those are from a dispirited lot. One anecdotal point of note: When I call cyclical analysts, they tend to pick up their own phones. They still haven't had many calls from funds. They are still being ignored. Those don't sound like characteristics of being late in the game. That's early.

It is possible that the market could be so strong that everything gets taken up. But all last week I saw a pattern that must be very disturbing to the bread-and-butter growth mutual funds: Their stocks got hit hard on declines and did not ramp on advances. Cyclicals, on the other hand, hardly got hit by the downturns and snapped right back. Again, that means the cyclicals are under accumulation and tech is under distribution.

I am an agnostic. Aluminum, bandwidth, copper, fiber -- I don't care. I know, though, if I could only pick among tech and health care, I don't think I would want to be fully invested. It's just not working.

Random musings:

Delete that

San Jose Mercury News

bookmark --

Adam Lashinsky

is with

TheStreet.com

now. Every morning for the last two years, I have come in and immediately hit up Lashinsky's column, as he has had a bead on the Valley like no one else. His column is the most powerful journalistic force moving technology

stocks

today, and you can't trade without reading it first. And now he is with

TSC

. Congratulations to Lashinsky for making the big move online.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in the stocks mentioned, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

letters@thestreet.com.