Commentary

The new market leaders

Money is moving out of last year's hot tech and energy stocks and back into beaten down sectors like financials and retailers.

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By Paul R. La Monica, CNNMoney.com editor at large

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NEW YORK (CNNMoney.com) -- A curious thing happened on Wall Street yesterday. The Dow surged more than 130 points and the S&P 500 had a healthy bump too. By all accounts, it was a good day.

But the Nasdaq, home to many of the world's top tech stocks, finished flat. And several of last year's big winners from the tech sector, such as Google (GOOG, Fortune 500), Amazon.com (AMZN, Fortune 500), Apple (AAPL, Fortune 500) and Research in Motion (RIMM), all finished the day in the red.

Alternative energy stocks that were market darlings last year also fell sharply.

Back in the late 1990s, many market strategists spoke frequently of this phenomenon, where tech and other momentum stocks would rise on days when the broader markets would slip and vice versa. The nifty word to describe this was bifurcation.

Well, bifurcation could be making a comeback - in short, it appears that investors are taking money out of last year's winners to buy last year's losers.

"Since the market lows of January, investors have been dabbling in the stocks that got destroyed last year such as homebuilders and industrials," said David Garrity, director of research for Dinosaur Securities. "There is a little rearranging of the deck chairs in terms of sector bets."

Yesterday's rally, spurred in large part by Warren Buffett's proposal to reinsure municipal bonds currently insured by troubled companies MBIA (MBI) and Ambac (ABK), could be viewed as a sign that the turmoil in the financial sector may finally be nearing an end.

Mortgage lender IndyMac (IMB), insurer AIG (AIG, Fortune 500) and investment bank Credit Suisse (CS), which have all taken their lumps due to exposure to subprime mortgages, were among Wall Street's winners yesterday.

And if money is moving into financials and other sectors that were hit hard at the end of 2007, such as retail, investors have to be moving it out of other sectors.

According to data from Thomson Baseline, only three sectors are up in the past month: consumer discretionary (which includes retailers and homebuilders), industrials, and materials. Financials, though down, have outperformed the S&P 500 and Nasdaq.

Tech, energy and utilities were among the hardest hit sectors in the past month.

Subodh Kumar, an independent market strategist, expects this trend to continue. He thinks that during the next few months, financials and industrials will emerge as market leaders and that utilities and energy stocks will probably lag.

But both Kumar and Garrity think that top tech stocks will eventually bounce back in the latter half of the year since investors will be unable to ignore their strong earnings growth potential.

In the meantime, money into beaten-down stocks won't be coming just from momentum stocks.

Before late last month, Treasury bond prices had surged as recession fears grew and investors sought safety.

But since the Federal Reserve's emergency rate cut in late January, bonds have pulled back. The yield on the benchmark 10-Year Treasury has risen from a low of 3.28% the day after the rate cut to about 3.7% (Bond prices and yields move in opposite directions.)

One bond expert suggests that investors may finally be willing to take more risks, which should benefit stocks more than bonds.

"A substantial component of the Treasury rally was a flight to quality," said Steve Van Order, chief fixed income strategist with Calvert Funds. "But we're running out of things to go wrong. Every day can't be worse than the last one forever."

What do you think? Are you starting to shift money into financials and other 2007 stock losers? To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.