When we zoomed into the first quarter, we had a multi-cylinder market.
Smart devices were powering a tech boom. Big exporters were taking advantage of robust economies in East Asia and a renewed Europe that seemed to put its troubled finances behind it. Banks, having paid back TARP, were ready to return capital. Health care, freed from the cloud of regulation, seemed ready to take off.
What a difference three months make. European debt concerns resurfaced and interest rates have climbed ever higher in Portugal, Greece and Spain. North Africa and the Middle East played dominoes, started by political uprisings in Tunisia that dropped into Egypt and then headed for Bahrain and Saudi Arabia before landing in Libya, driving oil up to $100 a barrel in their wake.
An earthquake and tsunami slammed into Japan, causing tragedy and fear in the markets, courtesy of runaway nukes, that was unprecedented. Besides the incredibly sad loss of life, the ensuing destruction seems incalculable given the inability to reach some areas or the isolation of regions affected by radiation fallout.
Major benchmarks have stalled after climbing by double digits during the previous two quarters. Where do investors go from here?
1. China - Chinese inflation has gotten away from the government, something a planned economy can't tolerate. We had escaped any real slowdown from China's interest rate increases until near the end of the quarter when telecom equipment makers Finisar (FNSR) and Ciena (CIEN) signaled that business in China was slowing.
Finisar went as far as to say there's a telecom equipment inventory "correction," meaning too much equipment and not enough demand. The guidance cut Finisar shares in half and had a deleterious effect on all the tech stocks that sell to the cellphone equipment and broadband sector.
2. Tech stocks - Tech could have withstood the shock of too much inventory in one country, even one as powerful as China, if it was the only soft story out there. But a growing glut in the tablet computer market will likely create more problems for the industry.
Company after company have tried to mimic Apple's (AAPL) wildly successful iPad, flooding the market with perhaps 100 million extra tablets. However, Apple recently unveiled an upgraded iPad that's considered so vastly superior that it will probably crush demand for also-ran tablets. That's a lot of product for computer makers to be stuck with, and a lot of lost orders for parts suppliers. AT&T's (T) plan to buy T-Mobile will add to suppliers' woes by making it easier for the telecom giant to demand lower prices.
While I still like Apple and own it along with EMC (EMC), Accenture (ACN) and Oracle (ORCL), I believe that tech should not be emphasized for the second quarter.
Here's where investors will find the best opportunities:
1. Banks - Financials, which do best in an economic rebound, will probably be one of the best-performing sectors. Go with the cheapest banks, such as Bank of America (BAC), and the best-run, which is PNC Financial (PNC).
Bank of America will likely gain during the second half of 2011 as housing and employment come back. PNC, which hasn't avoided the troubles that have plagued the industry, has been raising its dividend and buying its stock, something I expect to happen this spring.
2. Industrials - Demand for food and ethanol is increasing worldwide, boosting the prices of commodities. The car and housing industries are coming back in the U.S., and more than $150 billion in reconstruction work might be needed in Japan.
For industrials, Caterpillar (CAT) and Deere (DE) make the most sense. Caterpillar's going to get more than its fair share of business from the Japanese reconstruction. Deere? High food prices means wealthier farmers, which means more equipment purchases.
3. Metals and mining - These industries are best played with Alcoa (AA), which also offers a bet on the nascent aerospace cycle and demand for natural gas turbines, a trend you can expect after the nuclear catastrophe in Japan.
I also like Vale (VALE), the huge Brazilian metals company. It's a veritable supermarket of minerals that countries will shop as they build their infrastructures, driving prices higher.
4. Energy - Oil prices will probably stay above $90 a barrel as long as the conflicts in the Middle East and North Africa continue. That means oil, natural gas and coal producers will see a lot of activity.
There are lots of ways to win. I like Weatherford International (WFT) as a driller, Apache (APA) and Hess (HES) as two fast-growing majors, and Southwestern Energy as the cheapest natural gas play. This sector must be overweighted.
5. Retail - Retail has a bunch of winners. Lowe's (LOW) offers a catch-up play to Home Depot (HD). And Kohl's (KSS), the cheapest of the department store stocks, is returning more capital to shareholders than any other retailer in the form of dividends and buybacks.
Many people aren't intrigued by the market if tech stocks aren't playing a leadership role. Me? I always prefer the mainstay industrials and banks as leaders. That way you have a broader advance and one that is more self-sustaining and less hostage to product cycles and cutthroat competition.
Plain and simple: I am a buyer, despite the pessimism surrounding the market. I expect stocks to rebound from declines in recent weeks, but with a wider variety of companies leading the way this time.
Time to pull the trigger, just be sure you do it with different stocks this time around.
Cramer holds shares of Alcoa, Apple, Accenture, Apache, Bank of America, Caterpillar, Deere, EMC, Hess, Kohl's, Lowe's, Oracle, PNC, Vale and Weatherford in his Action Alerts PLUS charitable trust portfolio.
-- Jim Cramer runs the charitable trust portfolio, Action Alerts PLUS, and writes daily market commentary for TheStreet's RealMoney premium service.
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