Market gyrations keeping
stock traders on their toes

NEW YORK » For weeks, Wall Street has been talking about a rotation in stocks, away from riskier areas toward more defensive sectors, but it's been difficult even for professional investors to follow the momentum in this market.

Take, for example, the performance so far this year of real estate investment trusts, which fell out of favor in February and March as investors were seized by worries about pending action on interest rates by the Federal Reserve, then sprang back to life in April when that anxiety subsided.

Energy stocks have also gyrated, albeit in a different way; they surged in the first quarter, then slumped in April. The energy stocks in the Standard & Poor's 500 are still up almost 15 percent year-to-date, but they have collectively lost 4.6 percent over the last month, according to the exchange traded fund that tracks the sector.

Fears about the outlook for the economy have recently motivated investors to move into more defensive types of issues, such as health care stocks and consumer staples. Analysts say this is part of the economic cycle's natural progression, but be careful how much you bet on it. Trying to follow this trend too closely can be dangerous, because there's no saying it won't reverse itself in the coming months if the economy shows more vitality and energy costs abate.

"I'm calling it a churn rather than a rotation," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. "You would expect an orderly rotation at the midcycle, rotating out of industrials and materials, into defensive categories, and then a recession ... that would be nice and orderly. However, this has been anything but orderly."

For that reason, this is not the time to be micromanaging your sector exposure, Battipaglia said. If you had attempted to trade along with the momentum players over the last few months, chances are you would have been whipsawed right along with the REITs and energy stocks.

"A smaller investor should be focused on being diversified, and not be interested in trying to time the market and making allocation shifts on such a short-term basis," Battipaglia said. "To constantly move in and out of sectors based on their previous three-day performance is very perilous right now."

Despite the market's volatility, Battipaglia and other analysts remain optimistic about the outlook for the year, based on decent growth projections for corporate profits and gross domestic product.

On top of that, several events have helped raise confidence in the markets, such as the interest expressed by private equity firms in luxury retailers Neiman Marcus Group and Saks Inc., and billionaire investor Kirk Kerkorian's move to substantially raise his stake in troubled automaker General Motors Inc.

"This has sent a message to investors to look for more value plays," said Jack A. Ablin, chief investment officer at Harris Private Bank. "When we had that turbulence in April, it pushed investors into the largest stocks, paying the highest dividends; they went there just to try to hunker down. Now, after the Fed announcement, as the sun comes out a little bit, investors are migrating back to value plays."

Over the last week, the best performers were in consumer discretionary stocks, such as retailers and automakers, and in materials -- both sectors that were in the dumps a month ago. Even more speculative areas have benefited from bargain hunting; small-cap stocks, which have swooned since the year began, rebounded almost 3 percent, and the tech-dominated Nasdaq composite index, down 9.6 percent for the year, snapped back 2.4 percent this past week.

All of this signals a rebound in investor sentiment, Ablin said, which further underscores the importance of keeping an eye on the big picture, even through bumpy times.

"There were sleepless nights over the last couple weeks, and times when if I had acted on my emotions, I would've gotten burned, and thankfully I didn't," Ablin said. "Even the pros who do this for a living have these visceral reactions that run counter to what's right."

While there may still be opportunities in stocks, few analysts are forecasting huge profits. Instead of going out on a limb for share price appreciation, investors would be wise to focus on ways to goose total return, such as keeping expenses low and investing in more stable dividend-payers. At this stage of the economic cycle, it's natural for the market's leadership to shift away from growth stocks and toward less risky areas, said Ken Tower, chief market strategist for Schwab's CyberTrader.

"This shift from growth to safety is one of those signals that the economic expansion is mature and that the bull market is also quite mature, and that investors need to be a little more cautious over the next year or so," Tower said, adding that he's thought for some time the bull market would reach its peak this year. "As much as I would love to say the market will go up forever, I've got to be more short-term oriented than that. This bull market started two and a half years ago and the fact is it's getting old."