Is Tech Waking Up While REITs Fall Asleep?

Though we haven't looked at them in a while, it may be worth catching up on which sectors are hot or cold right now. Some of them might surprise you.

We could have justified adding numerous sectors and industries, but we tried to focus in on the ones with trends that either (1) looked like they were in a long-term cycle and unaffected by market pressures, or (2) appear to be on the verge of a short-term move that would still be unaffected by the market's short-term tide.

REITS

The multi-year bull run in the REIT market appears to have ended with a bang in February. Once the Dow Jones Composite REIT Index (RCI) hit 298.05 on February 8th, it's seen nothing but misery. It's currently around 242 - the worst dry spell we've seen from this group in years. Based on the momentum we see, it looks ready to move even lower. So, maybe it's not just a dry spell, but actually something much bigger....and much more bearish.

As for technical relief, we don't see anything in particular on the chart that suggests we're anywhere near a rebound. If anything, the index is actually under all of its potential support lines. And, with these stocks still an average of more than 100% above 2003's lows (despite the tumble from almost 300), it shouldn't be hard to justify profit-taking.

The underlying fundamentals are in agreement with the devaluation of the REITs themselves. There's this weird relationship - and not necessarily the one you think - between real estate prices, interest rates, and the economy. Where any of those are right now isn't quite as important as the direction they're pointed. As of right now, it seems at least two of the three are not advantageous for REITs. But, we don't feel any of the three are likely to change direction in the near future.

Utilities

Can you say 'resilient'? A couple of months ago, a lot of investors - and some experts - were finally convinced the utilities stocks had finally reached a top. After hitting a high of 537.12 in late May, the Dow Jones Utility Index (UTIL) proceeded to slide all the way to 484.51....a 9.8% correction. The pullback drove the index under the key 100-day moving average line for the first time in months, which was a major concern. Plus, the sheer size of the dip was certainly an omen of worse to come, right?

Wrong! The utilities stocks got their act together in late June, and managed to at least find their way back up to 517 - and well back above the 100 day average line.

Maybe those worry-warts should have studied the historical chart patterns here. Why? This index has a history of generally solid movement ending with a big blowoff rally, followed by a pretty steep lull. The lull, though, has been temporary for a few years. Simultaneously, crosses above the 100 day line have rarely signaled worse than a flat period, and frequently signaled a renewed uptrend. Astute chart watchers may have also noticed the index was running into along-term support line in June. So, some bullish technicals are indeed in place.

With that in mind, we suspect some of these names may be geared up for yet another one of this sector's stealth rallies. On average, they moved about 20% higher between January and May, yet didn't seem to get any-body's attention. Well, they've got our attention now.

Be careful though - even utility stocks can and do get way overbought. And surprisingly, though these birds may be of the same feather, they certainly don't all flock together. Check each chart and fundamental story very thoroughly.

Technology

This sector, which had been sub-par for most of the year, has really come on strong lately. The AMEX Technology Sector SPDR Index (KXV) is up 5.4% over the last month - one of the best sector performances during that time. And none too soon, most tech owners might say. Up until early June, technology stocks had only yielded about 6%, lagging most other sectors.

Could this be a sign of a technology revival? We're not calling for a repeat of 98/99, but these stocks are more than due for a day in the sun. They've been lagging - noticeably - since the beginning of 2004. Despite strong corporate results coupled with a major degree of growth opportunity, they just didn't seem to be what investors were looking for. Of course, nothing lasts forever.

The term is 'rotation'. As far as the equity market is concerned, the concept is just a reference to one or more groups of stocks falling into favor at the expense of another group or groups - something different than the proverbial rising tide lifting all boats. It's not exactly clear which stocks are suffering while technology is benefiting, but we suspect health-care and financials are taking the brunt of it.

A quick observation though....the major/traditional names don't seem to be the ones poised to pay off. Intel (NASDAQ: INTC), Texas Instruments (NYSE: TXN), NVIDIA (NASDAQ: NVDA) - they all look about one stumble away from falling all the way down the stairs.

Instead, we saw what we feel are more compelling ideas from the smaller names in this group. Supertex (NASDAQ: SUPX) caught our eye (and no, we hadn't heard of it either) with solid fundamentals backing up what looks like could be chart on the mend. The same goes for QLogic (NASDAQ: QLGC).

Regardless, we think now may well be the beginning of better times for these stocks. One of the specific technology areas we like is..........

Computer Storage

Call it what you want - data storage, storage hardware, disk drives....it doesn't matter - these stocks are pointed higher in a pretty decisive manner. In fact, the AMEX Disk Drive Index (DDX) is up 18% since May's bottom. Of course, a move that big could be a little intimidating; can the engine really keep running that hot? Our answer is, it depends - when you check under the hood, you'll see a lot of variety in shapes of the charts. Some of these names look exhausted, while others look like they're just getting started.

Take EMC Corporation (NYSE: EMC) for instance - it's been red hot since March. Though the upward momentum is mind-boggling, it's also well overbought. Seagate (NYSE: STX) has also been going like gangbusters since May, but it had the advantage of starting at the bottom rung of the ladder.....an easier rebound move.

As it turns out, a lot of the bigger storage companies with strong rallies, like SanDisk (NASDAQ: SNDK) and Western Digital (NYSE: WDC), are starting to defy the odds. So in this particular case, we're halfway inclined to seek out some of the smaller names most people may have never even heard of. Ramtron International (NASDAQ: RMTR) looks like an interesting chart, with forward-looking fundamentals that appear highly promising. Overland Storage Inc. (NASDAQ: OVRL) doesn't have the same fundamental credentials as Ramtron, but the chart suggests there may be a rebound in the works now that the loss of its NASDAQ Global Select listing eligibility has been priced in.

Bottom Line

As always, these are just potential trends we see - mostly based on the underlying charts, and for educational/illustrative purposes only. Odds are at least some of these charts won't materialize the way we're describing they could here. So, your own due diligence and follow-up is merited if you decide to turn any of these ideas into something actionable.