The Tech Bear Gives a Boost To Financials (XLK, XLF)
Tech hasn't seen anything like the current destruction of value since 2000-2002. Before that, you have the 33% erosion of tech stock prices during the 1998 currency crisis.
But the comparisons end there. The current pain in tech's backside... a 20% drop from top to bottom... is more representative of the U.S. recession. (See my December and January columns on a recession's impact.)
Clearly, the spillover from subprime/financials/real estate has finally arrived. And the previous 5-year bull market that was led by tech and energy has come to a halt.
Here in 2008, the leadership has shifted to the laggards. The best performing segments so far include Consumer Discretionary (XLY), Financials (XLF) and Homebuilders (XHB). These are the same areas of the market that have all been down more than 30% from their highs!
Yet the times they are a changin'. Select SPDR Financials (XLF) and Select SPDR Consumer Discretionary (XLY) are about even for the first month of 2008. These areas are down a bit YTD. In contrast, Select SPDR Energy (XLE) has coughed up losses of 10% and Select SPDR Tech (XLK) has lost 15%.
What conclusions might we draw from these facts? What does it say for stocks when financials and consumer cyclicals are winning the day, while the rest of the market is tanking? To me, it says that the bearish environment that effectively began 10/9/07 may be short in total duration.
Let me explain.
One cannot say with total certainty that we will leave the bear's woods quickly. Yet we can look at the willingness of investors to shift out of tech and into financials as a sign of faith in a milder recession.
Here's evidence that I collected in a September column titled, "The Growing Gap Between Technology (XLK) and Financials (XLF)." Essentially, I identified the troubling pattern by which the returns for tech from 3/14/07 through 9/13/07 were significantly outpacing the returns for financials. The 6-month spread or, differential, was a staggering 22%.
What's the current 6-month spread through 2/6? The "tech-over-financials gap" is down to about 8%. And as the chart below may be indicating, the 6-month return for financials may very well eclipse tech in the near future.
The shift of assets from former high-flying segments to the "beaten-downs" does suggest that the investment market is anticipating; that is, the stock market is anticipating that the Fed's more aggressive rate cutting stance will help banks. The stock market is anticipating that a Congressional stimulus package for the economy will increase consumer spending. And the stock market may even be anticipating an eventual turnaround for homebuilders.
This does not mean that banks are currently in great shape... they are not. Nor does it mean that retailers will suddenly be registering record profits. Nor does it suggest that homebuilders are going to be on the upswing of building anytime soon. It simply means, the stock market anticipates that the hobbled will begin to walk, while the ultra-athletic "Ciscos" are only now dealing with a groin injury.
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