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
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
and could soon infect
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.
was better than expected last week,
have been bullish, and
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.
are even more impressive and have seen heavy
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
On Monday Chancellor Angela Merkel
told her compatriots
to stop complaining about the Continent's weak countries and today
called for a more aggressive integration. The last
of investor confidence was also strong, and Berlin
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
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
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.)