Myriad opportunities beyond tech


Technology has been weak, and investors shouldn't expect a turnaround soon. The good news is that there are plenty of other places to look for performance.

As a sector, tech faces at least two big problems. One is the cyclical weakness in the global economy, largely caused by the blowup in Europe. Much worse is the secular decline in personal computers, which has become like an unbandaged wound that won't stop bleeding.

The charts of Dell and Hewlett-Packard have told this tale for months, and now the bad effects are spreading like ripples throughout the sector. It's been hanging over the chip industry and could soon infect hard-drive makers such as Western Digital and Seagate Technology as well.

This trend has recently appeared in the relative strength. Tech was the strongest sector in the S&P 500 in the first half of 2012, based on the performance of the XLK Select Sector fund, but it's been lagging the broader market since June 30 and is the worst performer in the last month.

PCs may never come back, and it's not clear how long it will take before Europe recovers enough to inspire a real improvement in business spending. All of these considerations make me think that the weakness in tech could last for several months or more. Given Apple's heavy weighting in the Nasdaq, that could also take the wind out of the company's sails for the time being.

However, plenty of other trades are working. The first involves the U.S. economy and consumer, which remain strong. Consumer sentiment was better than expected last week, jobless claims have been bullish, and housing is clearly on the road back from the subprime debacle. Retail sales have remained good, and this year will probably have a surprisingly positive holiday shopping season.

Another positive is that some old smokestack industries seem to be coming back from years of abandonment. Packaging and paper, for instance, went through a long period of closing factories and reducing capacity, but now companies like International Paper and Ball Corporation are at long-term highs. Chemical companies are even more impressive and have seen heavy call buying this week.

I am not recommending chasing these per se. The point is that new areas of growth are being discovered, and the S&P 500 can continue to climb even if technology struggles.

The most important trade of all, in my view, is Europe's recovery from the dead. Short interest in the euro stood at record levels earlier this year as bears held their breath for a crash that never happened. Spanish and Italian borrowing costs continue to fall, and just this week German political leaders have been beating a strong pro-Europe drum.

On Monday Chancellor Angela Merkel told her compatriots to stop complaining about the Continent's weak countries and today Finance Minister Wolfgang Schaeuble called for a more aggressive integration. The last Zew survey of investor confidence was also strong, and Berlin just raised its growth forecasts.

I don't know much about German politics, but I can only imagine that Merkel and Schaeuble would make such bold statements if they're confident of success. This tells me that there is no real opposition to bailing out Spain, Greece, and potentially Italy. Some voices may protest, but they're not going to stop European integration.

That takes crisis off the table and may bring us back to the environment that existed between 2003 and 2008. That's when the euro steadily climbed as central banks and global investors shifted reserves out of the U.S. dollar and into the common currency. If Germany is truly committed to making Europe work, that long-term flow of money will resume--and we're talking about hundreds of billions of dollars.

Combined with the short interest and the fact it made a higher low in July versus its trough in 2010, there will be a steady trend of dollar weakness and euro strength. That rising tide will lift many boats, especially energy, precious metals, materials, and financials.

Despite all the fears about Europe, the world didn't end. Risk appetite is coming back, and that's the trade for now.

(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Oct. 17.)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing , Options

Referenced Stocks: AAPL , STX , WDC



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