Barron's Monday afternoon Getting Technical column (supposed to be free this week) was about the strong chart action in the telecom sector of late.
Back on December 17th I wrote that I thought Telecom, as a sector, would provide leadership to the market. While it is way too early to think I am right, it might be worth revisiting the logic now that a couple of months have passed and I was not immediately wrong.
Over the last two months Telecom has outperformed the other big S+P sectors except for technology which looks like a tie (eyeballing a chart), although Telecom has been in a slow steady and stronger uptrend than all the sectors since bottoming at year end.
The faith in Telecom has several simple, top down facets to it as a starting point. First, it was partially a contrarian call. Telecom has not been a well liked group for a long time and eventually everything will come back into favor.
Very few people had anything positive to say, actually I don't remember hearing anything positive before I wrote about it, but my being first makes no sense at all.
Why is the sector doing well? I think it's the same thing it almost always is when a down and out sector rotates back into favor. The thing is nothing. There is no reason why they are going up. They just are.
This speaks to a couple of important concepts. If you thought Telecom would continue to do poorly (which is reasonable) and you probably had a tough time keeping up with the market for the last couple of months. Completely giving up on an area of the market is a bad idea (this is something I repeat often) and this little move in telecom is a great example.
The other point to make here is a little tougher to process. No S+P sector has as big of a theme behind it as energy does (in my opinion). This means that a sector that did well last year might not do well this year. If Telecom does follow through for the whole year, I might not expect it to repeat in 2007. For the time being these sectors are moving more on money flow and sector rotation than fundamentals.
If the economy does head into a recession, two sectors that would probably rotate into favor would be healthcare and consumer staples, something to think about.
Wikinvest Wire
1 comments:
Ah, not too sure about those sectors (although I own healthcare leveraged ETF), I read some research and did some analysis last night that caused me to re-think my position.
The article is here,
http://etfinvestor.com/article/6500 ,
pointing out that sectors/etf's that tend to do best are those with low pe's and high earnings growth.
Buyside research then does an analysis on some 100+ eft's to see which ones meet those criteria as of third quarter 2005 earnings (go here, http://buyside-research.com/ , and click on the Wall Street Journal picture to see the spreadsheet).
One of the worst sectors (High PE and low Earnings Growth)is anything that has "consumer" in the title , and healthcare didn't fare well either. I'm thinking of bailing out of the healthcare, but the only thing that continues to attract me there is their perennial 20%+ ROEs. Still, it doesn't necessarily look all that good for the next 12 months forward, based on the Buyside data and historical trend analysis.
Jay Walker
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