The Great Equity Rotation: Into Tech and Away From Retail

NEW YORK (The Street) -- A move away from consumer discretionary stocks and into technology and utilities over the past few weeks lends telling insight into sentiment, fund managers said.

It also paints a complex picture of the U.S. recovery, one where lackluster retail sales hint at cracks in the economy even as risk appetite for sectors such as technology pick up.

Strategists also described the rotation as seasonal, with investors cashing in gains from sectors that outperformed last year as they cast a fresh eye to 2014.

Take consumer discretionary stocks. They posted a stellar 37% return last year as confidence in the economic recovery gathered steam, but have recently faltered, shedding 3.2% so far in January after disappointing holiday sales. Energy stocks returned 19.6% last year but have shedded 2.9% since the start of 2014. Utility stocks appear to be at least briefly back in favor, having notched gained of 1.14% this month after gaining less than 7% in 2013.

Amid the market rout on Friday, investors showed clear risk-off behavior: Defensive sectors such as utilities and telcos were off less than 0.14% while riskier sectors such as technology and consumer discretionary were both shedding more than 1%. 

Yet overall, strategists said strength in small-cap performance and sectors such as the Dow transports -- bellwethers of confidence -- show a solid underpinning for equities.

"There is more growth in technology vs. other sectors where several stocks have surprised on the earnings front," Schaeffer's Investment Research senior technical strategist Ryan Detrick said in a phone interview. "But retailers show cracks in the economic recovery."

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