Returning To Risk - The Nasdaq Looks Like The Place To Be Again

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For the first three years and two months since the March 2009 bear market bottom, NASDAQ stocks broadly led other stocks listed on other American exchanges. This behavior of perhaps the most economically sensitive sector, technology, leading the rest of the market in the early stages of a bull market is typical. However, as the bull market aged and investors started to rotate to safety (big cap consumer staples, healthcare, and utilities), technology stocks began to lose favor, with the relative strength line for the PHLX Semiconductor Index peaking in February 2011 and the relative strength line for the NASDAQ peaking in April 2012. It looked like some of the early signs of weakness often seen before a major market peak. Then the central bankers of the world decided that was not the correct path and flooded the world economy with cash, which made the market act as if it had just rebounded off of a major market bottom.

First it was utilities, as investors skeptically put more money to work in defensive issues, wary of the impact of the fiscal cliff (from November to April, XLU climbed 30%!). Then, the small cap Russell 2000 and S & P Mid Cap Index outperformed, but both lost ground before and slightly after the sequester. Finally, as the market refused to even pull back, money began to flow to the forgotten sector, technology.

Here is where we are now. The defensive investing styles of 2012 are obsolete, or at least until central bankers decide to take away the proverbial "punch bowl."

Investors appear to be running from low growth, safe sectors like utilities in recent weeks.

Not to mention that the yield investors have demanded for high grade corporate bonds has climbed in recent months, as the perceived value of safety declined.

While signs of new life are evident in the relative strength line for semiconductors versus the S&P 500 (semis lagged for years).

And the NASDAQ looks like it will likely continue to outperform the market.

Yes, even Apple (NASDAQ:AAPL) looks stronger, but more investor demand is likely needed to push the stock above $460, which has historically provided some issues for the stock.

The phase so popularized in 2012, "don't fight the Fed" now carries a corollary, which is "don't fight the market." The character of the market is changing, and as investors, we should adapt to enrich ourselves as much as possible. From a fundamental view, the non-cyclical sectors carry the most unattractive P/E valuations as well, especially when considering their relatively low growth prospects vs. other sectors. For a quick example, the consumer staples SPDR ETF (NYSEARCA:XLP) has a P/E of 17, while the technology SPDR ETF only has a P/E of 13.

So for those investors still clinging to the 100% defensive portfolios of last year, consider diversifying a bit until conditions tell us otherwise. (NYSEARCA:USD) and (NYSEARCA:SMH) offer exposure to semiconductors, which have been outperforming the NASDAQ in recent weeks. (NASDAQ:QQQ) and (NASDAQ:QQEW) both track the NASDAQ on a weighted and equally weighted basis (Apple skeptics might like that). For those who are still too risk averse to the ETFs, consider a buy-write or married put, which will lower overall risk considerably.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.