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  • A Tech Rotation Sets Up

    By Rev Shark
    RealMoney.com Contributor
    2/16/2006 9:00 AM EST

    "The conditions of conquest are always easy. We have but to toil awhile, endure awhile, believe always, and never turn back>"

    -- Marcus Annaeus Seneca 

    The market has had a mix of action lately with the DJIA hitting its highest point in five years and the Nasdaq still well off its January highs and in a slight downtrend. Over the past couple of weeks, energy, metals and some cyclicals have pulled back sharply and momentum and small-caps have stumbled. However, some of the badly battered big-caps have bounced and that has helped drive the big-cap indices.

    Yesterday we also had our first extended look at Ben Bernanke in his role as new Fed head. Despite worries that he might do some jawboning to make sure everyone knows he is serious about inflation, he instead indicated that the Fed was open-minded and looking toward further data points before making decision. Overall, Wall Street seemed content with his comments but we will have another dose today as our pontificating senators get a chance to gain some television face time asking long-winded questions.

    Despite the indices being at or close to highs, the Investors Intelligence survey yesterday reported that bullish sentiment was now under 50%. Market participants are obviously feeling somewhat positive because the market is holding but they are a bit worried and not embracing the market in a wild bullish frenzy.

    All in all, conditions appear quite ripe for further market upside: Bernanke has helped cool inflation and Fed fears to some degree; sentiment may not be downright negative but it is sufficiently negative enough to indicate there is idle cash on the sidelines; and most interesting, the sharp pullbacks in energy and metals are supportive of a rotation into technology stocks, particularly semiconductors. Technically the Semiconductor HOLDR (SMH:AMEX) is set up nicely to take out recent highs and challenge the early January levels.

    I've hypothesized about the possibilities of a rotation into technology for a couple of months now but after a couple brief attempts it has sputtered out. The difference this time is that the energy sector in particular has pulled back to a much greater degree. A quick bounce back to recent highs is now much more difficult because bottom fishers have been buried, momentum investors stopped out, and bears emboldened. If and when energy does bounce, the likelihood is the strength will be used to exit the sector and move on. The logical place to move into is technology.

    Conditions look good this morning for the bulls and I have the feeling that there are a fair number of bears and underinvested bulls who will be scrambling if we get some upside juice. As I mentioned last night, I will be looking at the chip sector in particular for some new buys following the good earnings news last night and the healthy technical setup.

    We have a positive start on the way. I'm hoping the bulls can keep it contained and build throughout the day rather than get overly excited right away. Overseas markets were mostly up. Oil and gas were bouncing a bit but gold remained under pressure. None.

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