As Rally Stalls, Tech May Be The Answer

With questions looming over whether Wall Street's three-month rally is running out steam, some portfolio managers are turning to technology as a way to ride out the next stock market cycle. 

After jumping as much as 35 percent off the March lows, stocks have been in the doldrums lately, trading in a tight range as investors ponder data points that mostly show a tepid economic recovery at best.

Technology stocks, though, have taken on a fairly strong leadership position, and the fundamentals of the industry are indicating that could continue. 

"From a fundamental standpoint, the good thing about technologies is they're typically low-leveraged," said Peter Miralles, president of Atlanta Wealth Consultants. "Since this has been a credit and leverage problem in this recession, technology actually is doing pretty well compared to some of the other groups. That trend will continue."

In both broad and narrow comparisons, tech has outperformed both during the massive stock market collapse off the October 2007 historic highs and through the spring 2009 rally.

The Nasdaq tech gauge is up roughly 31 percent since its March 9 low, while the Standard & Poor's 500 is up 27 percent and the Dow industrials have gained 22 percent over the same period. Even as the stock market dropped Tuesday, the Nasdaq's losses were only about half those of its counterparts.

Similarly, tech-based exchange-traded funds also have been among the market's leaders, occupying top spots in both percentage gains and total performance this year.

The Direxion Daily Technology Bull 3X (NASDAQ: TYH) is the fourth-largest gainer by percentage this year of all ETFs, surging about  64 percent. The fund tracks the small-cap Russell 1000 Technology Index.

Similarly, the Ultra Technology ProShares (AMEX: ROM) ETF, which provides twice the performance of the Dow technology index, has popped 49 percent in 2009 and is also in the top 20 percentage gainers, according to Morningstar.

The more closely followed and much higher volume tech ETF, the PowerShares QQQQ (NASDAQ: QQQQ) that follows the Nasdaq, is up 22 percent for the year. The Qs, as the ETF is known, has moved into a bullish position according to its 80-day and 200-day moving averages, according to Schaeffer's Investment Research in Cincinnati.

"Despite this outperformance, investors continue to overlook and to bet against the shares," Schaeffer's wrote in an analysis for clients.

The company is bullish on techs, saying options trading also is showing higher trends for the group. Schaeffer's specifically recommends Palm (NASDAQ: PALM), Synaptics (NASDAQ: SYNA), Juniper Networks (NASDAQ: JNPR) and (NASDAQ: PCLN).

To be sure, there are some caution signals out there for tech: Some are suspicious of the sector precisely because of how strong its run has been and caution that a pullback, much like many have been predicting for the broader market, could be in the makings.

The fears, though, seem to be more confined to the short term, and many remain bullish for technology over the longer haul.

"We're getting mixed signals from the technology sector at least in near-term outlook," said Steven Roge, portfolio manager at Roge Partners in Omaha, Neb. "From a growth perspective on the short term, things are looking fairly neutral. From a long-term perspective, we're slightly bullish on the technology sector at this time."

Roge thinks any move higher in stocks is likely to continue to come from the beaten-down sectors that still have room to run.

As for technology, there is some indication of bumpiness ahead, but there's large options put interest at the 35 strike for the QQQQ ETF, just below its current level.

"In most recessions you're going to see technology become a leader, but of course with tremendous volatility like technology has always had," said Miralles, who sees chip companies as being cyclical while hand-held devices "is where the action is."

As financial companies continue to battle their way through the minefield of credit issues and inflation, technology companies that historically have low exposure to leverage and even inflation are likely to persevere.

"One thing that makes us slightly bullish is the balance sheets of these comapnies, and valuations are still relatively compelling," Roge said. "Typically technology companies keep more cash on their balance sheets, so they have a lot of room to work with."

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