It’s no secret that technology stocks have been the big drivers of the market’s impressive run over the past two months. Off all the major sector groups, technology has posted the largest gains: Since Sept. 1, the Technology SPDR (NYSE: XLK) is up nearly +22%. Compare this to the +4.5% gain in defensive utility stocks over the same period.
As a result, Wall Street pros have increased their exposure to the sector. Credit Suisse researchers find that small cap tech allocations have pushed to four-year highs. The increase has been especially noticeable in small-cap value managers — who have focused on highly cyclical hardware stocks.
But now, with sales of computers and electronic products beginning to slow with growth falling from 15.1% in August to 7.4% in September according to Credit Suisse, the question is: Are tech stocks now overbought?
We can actually broaden the question to include the entire “global growth trade” since small cap mutual fund allocations to both the materials and the industrial sector has now reached mid-2008 allocation peaks. Remember that back then Wall Street was abuzz over the “decoupling” theory — the idea that the fast-growing emerging market economies could continue to expand despite troubles in the U.S. and other developed nations. We saw a mini version of this idea take hold over the past few months as U.S. economic growth and job creation stalled; while at the same time, emerging market stocks soared.
Lori Calvasina at Credit Suisse believes that both tech stocks as well as the global growth trade are in a “potentially overbought condition” and suggests looking elsewhere for returns — including underweight financial stocks or energy stocks.
Barclays Capital strategist Barry Knapp suggests looking at cheap defensive plays in the utilities, telecom, health care, and consumer staples space. He notes that these sectors are “showing improved analyst earnings estimate revisions and should perform well at this stage of the business cycle.”
And finally, fund flow data from the folks at EPFR suggests that ETF investors are currently carrying the highest short interest in financial, energy, and healthcare stocks. And as the folks at TrimTabs recently discovered, ETF investors make horrible market timers. So that suggests now is the time to look for opportunities in these areas.
Given all this, I suggest investors focus on diversifying their portfolios out of overbought tech, industrial, and materials stocks and look for trades in the down-and-out financial and energy sectors as well as high-dividend utility plays. Candidates include Huntington Bancshares (NASDAQ: HBAN), ConocoPhilips (NYSE: COP
), and Duke Energy (NYSE: DUK).
Anthony Mirhaydari does not own a position in any company mentioned.
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