NEW YORK >> With the stock market appearing its firmest in months, investors looking for the best bets for profitability when the economy and corporate profits begin improving will find little consensus among analysts.
Investors seeking next
sector to take off
Semiconductor and retail stocks
already have been showing signs of life
By Lisa Singhania
As trading this week illustrated, the overall market appears to be in a holding pattern.
Investors hesitated to take any strong positions, instead alternating between technology and blue chips. Although the three major stock indexes slipped for the week, their losses were expected after April's strong advances.
In addition, trading volume was light all week, especially yesterday when the New York Stock Exchange and Nasdaq Stock Market recorded one of their slowest days of the year.
"Back in 1999 and 2000, we had technology to move stocks higher. Part of the problem we are having in this market is you haven't had consistent sector leadership in sectors strong enough to take the market up," said Richard Dickson, a technical analyst at Hilliard Lyons. "You have to make some type of coherence or you end up jumping from sector to sector and going nowhere."
That's not to say some sectors aren't doing better than others. Retail and semiconductor stocks, which historically been among the earliest performers in recovering markets, are reporting higher rates of return than the broader market.
The Philadelphia Semiconductor and Standard & Poor's Retail indexes are up nearly 7.0 and 6.2 percent, respectively, for the year, compared with the broader S&P 500, which is down about 5.6 percent.
"The pattern is that retail stocks outperform early in a slowdown and then they underperform for a significant time and shortly before the slowdown is over, they outperform," said Linda Kristiansen, a retail analyst at UBS Warburg, who expects to see healthy December sales but isn't sure the momentum will last. "I think we're still in the middle of the correction."
Daniel Barry, Merrill Lynch's senior retailing analyst, is more bullish, predicting strong performance ahead for the sector.
"I think retail is going up and it's going to outperform the market for the balance of the year," he said. "The average cycle for retail stocks is about 18 months. We're in the eighth month right now, so we should have another 10 months of performance."
Opinions vary even more widely when it comes to technology issues.
In a research note issued this week, Morgan Stanley upgraded several semiconductor stocks noting "we expect the next cyclical upswing to begin in September or October as the year-over-year growth rate for chip industry revenues begins to reaccelerate."
The idea behind this theory is that the Federal Reserve's lowering of interest rates will spark consumer spending, which should coincide with more orders for semiconductors, the computer chips that form the building blocks of a lot of consumer goods like TVs and computers.
The skeptics, though, are vocal and numerous. Unlike retail stocks, which have been around for decades and have a longer track record, technology stocks' behavior is less well known. It wasn't so long ago that analysts were talking about the "New Paradigm" -- the idea that technology was so important to businesses and the economy that it wouldn't be vulnerable to downturns.
"With the semiconductors, the only thing that's changed is the psychology. People are buying now with the expectation that a turnaround won't happen until next year, but they'd rather be early than late," said Phil Dow, director of equity strategy at Dain Rauscher Wessels. "I wouldn't read anything else into this."
Meanwhile, interest rates are another variable. The Federal Reserve is widely expected to cut interest rates for the fifth time this year next week. But how much, or whether the Fed may be nearing the end of its rate-cutting cycle, remains a topic of much speculation.
Inflation also remains a potential issue, although most economists say data doesn't indicate pricing is a problem right now.
The bottom line for investors, say most analysts, is to keep focused on longer-term returns and realize that the market's recovery may take awhile.
"If you're going to buy stocks, you should be very, very selective," said Dickson, the Hilliard Lyons analyst. "Use market pullbacks, not rallies, to build a position in technology. I'd also be looking at financial and health care stocks. They tend to be more stable, even in times of weakness."
The Dow finished the week down 129.93, or 1.2 percent, at 10,821.31 on an 89.13 loss yesterday.
The Nasdaq composite index fell 84.10, or 3.8 percent for the week. It closed yesterday at 2,107.43 on a drop of 21.43.
The Standard & Poor's 500 ended the week off 20.94, a 1.7 percent change, after slipping 9.51 to 1,245.67 yesterday.
The Russell 2000 index dropped 3.22 yesterday to 487.36, ending the week off 5.53 or 1.1 percent.
The Wilshire Associates Equity Index -- which represents the combined market value of all New York Stock Exchange, American Stock Exchange and Nasdaq issues -- ended the week at $11.491 trillion, down $196 billion from the previous week. A year ago, the index was $13.151 trillion.