Tech, Financials Regaining Favor Among Investors

The tide may be shifting in the market.

Money is moving out of commodities and into growth cyclicals such as technology and financials in anticipation of an economic recovery in the second half of 2009.

Just follow the numbers: The dollar is approaching its highest levels since February. Crude oil has dropped $10 in the past week and gold has declined about $250.

"People were chasing oil and gold for a while, but that got old," said Matt Cheslock, senior specialist at Cohen Specialists. "Big techs are the focus -- that's where the momentum is right now," he said. "They're selling commodities and buying banks and beaten-down techs."

“The growing consensus is we've seen the worst out of the financial sector and the economy overall, and people are willing to take more risk and exposure in equities," Michael James, senior trader at regional investment bank Wedbush Morgan, told CNBC.

The energy sector gained nearly 11 percent in April, making it the best performer, but all the while, techs and financials were creeping up behind it: Information-technology came in second with a nearly 7-percent increase, followed by financials, which rose 6.3 percent.

The tech-heavy Nasdaq rose 6 percent in April, its second-straight monthly increase and highest percentage gain in nearly three years.

Watch the Chips

It might seem a little premature to be calling a recovery, particularly when the economy is still losing jobs and factories are sputtering. But analysts say it’s just the nature of the beast.

“Due to proliferation of hedge funds and greater efficiency of the equity markets, it appears that investors are trying to anticipate recoveries earlier and earlier each year to capture the potential flows of money in any particular group such as technology and financials,” said Steve Neimeth, portfolio manager at AIG SunAmerica.

Technology is usually the first one out of the gate to discount economic activity, Neimeth said. “Today, tech is discounting a recovery in mid-2009 as investors appear to be betting that the massive Fed stimulus this year has very beneficial effects on GDP growth come the second quarter of '09."

Neimeth also is watching semiconductors as a leader with the tech sector.

Tech typically discounts the economy a year in advance, Neimeth said, while semiconductor-capital equipment -- such as Applied Materials and KLA-Tencor -- discount an improvement in sales 12 to 18 months in advance.

"This is a sub-sector that investors should really be watching as an indicator of future economic growth," Neimeth said.

The Philadelphia Stock Exchange semiconductor index jumped 25 percent in April, and two of the S&P’s top-ten performers for the month were semiconductors -- Broadcom and Micron Technology .

Strategists and traders offered a variety of reasons for the shift – everything from the Bear Stearns bailout to better-than-expected economic data – but it all seems to circle back to one thing: The dollar.

"The dollar got stronger, so people started to rotate out of commodities. Where are they going to go? They want to buy stocks," said Dave Rovelli, managing director of equity trading at brokerage Canaccord Adams.

“I’m seeing a ton of buying in technology,” Rovelli said. “I’m starting to see people raising their price targets on tech stocks, including Research In Motion ,” he said.

What really drove home the shift was strong earnings from several big-name techs.

“Tech earnings were a lot better than people expected,” Rovelli said. “It started with RIMM. Then Apple confirmed it and Google really confirmed it,” Rovelli said.

Blackberry maker Research In Motion saw its profit and revenue more than double in the latest quarter from a year earlier. Apple’s earnings jumped 36 percent amid strength in the company’s Macintosh-computer business, while Google saw its profit increase by nearly a third amid resilience in online advertising.

One thing that has helped tech results is that more than half of the tech sector’s revenues come from overseas. Take RIMM, more than one-third of its subscribers are outside North America, and Google, which derives 51 percent of its revenue from overseas.

“The nice thing about semiconductors is that they fit both ideas -- they’re global growers and early cyclicals,” said David Bianco, a strategist at UBS Investment Research.

Bianco raised UBS’s rating on semiconductors to “overweight” Thursday, citing global demand, notably from China and India.

Adding to tech’s allure is the fact that the sector has been beaten down.

“This is the cheapest I’ve ever seen tech,” Bianco said.

“Tech has the least demanding valuation in probably at least 20 years,” Bianco said. “It’s really dirt cheap when you approach valuation … with consideration of interest rates, balance sheets and earnings quality.”

And, while many consumers say they plan to spend their rebate checks on household items like food and gas or to pay down debt, a chunk of that could be spent on discretionary items, particularly if gasoline prices start to follow crude lower.

“Both tech and consumer-discretionary have a very high inverse correlation to energy,"  Neimeth said. "It makes sense – if energy and gas prices go down, you have more money to spend on clothes and iPods.”

Economists project that consumers will spend 35 percent of their checks, based on the results of the 2001 rebates, and this could benefit tech companies.

Fresh Money?

There’s still a lot of money on the sidelines in today’s market as investors wait for the volatility to shake out.

"There hasn't been a new wave of cash into the market -- this is just redeploying cash that's out there," Cheslock said of the shift toward early cyclicals.

But analysts and traders said this is just the beginning and it’s only a matter of time before the new money follows.

“I think you’re going to see inflows into mutual funds – people are going to start shifting money from money markets and Treasurys into stocks,” Rovelli said.

"I would suspect as the market begins to work higher,” Neimeth added, “investors are going to be scared out of their very high levels of cash into equities."

© 2009 CNBC.com