Back on December 17th I wrote that I thought Telecom, as a sector, would provide leadership to the market. While it is way too early to think I am right, it might be worth revisiting the logic now that a couple of months have passed and I was not immediately wrong.
Over the last two months Telecom has outperformed the other big S+P sectors except for technology which looks like a tie (eyeballing a chart), although Telecom has been in a slow steady and stronger uptrend than all the sectors since bottoming at year end.
iShares US Telecom (IYZ) vs. S&P 500 -- 2006 year-to-date:
The faith in Telecom has several simple, top down facets to it as a starting point. First, it was partially a contrarian call. Telecom has not been a well-liked group for a long time and eventually everything comes back into favor.
Very few people had anything positive to say (actually I don't remember hearing anything positive before I wrote about it), but my being first makes no sense at all.
Why is the sector doing well? I think it's the same thing it almost always is when a down-and-out sector rotates back into favor. The thing is nothing. There is no reason why they are going up. They just are.
This speaks to a couple of important concepts. If you thought Telecom would continue to do poorly (which is reasonable), then you probably had a tough time keeping up with the market for the last couple of months. Completely giving up on an area of the market is a bad idea (this is something I repeat often) and this little move in telecom is a great example.
The other point to make here is a little tougher to process. No S+P sector has as big of a theme behind it as energy does (in my opinion). This means that a sector that did well last year might not do well this year. If Telecom does follow through for the whole year, I might not expect it to repeat in 2007. For the time being these sectors are moving more on money flow and sector rotation than fundamentals.
If the economy does head into a recession, two sectors that would probably rotate into favor would be healthcare and consumer staples -- something to think about.
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