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Worst of 2009 to be best of 2010?

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A worker holds a pencil up to the side of the new LED 9000 television by Samsung to show its thickness of less than .3 inches during a press event at the 2010 International Consumer Electronics Show at the Venetian in Las Vegas, Nevada. The TV has built-in 3D and has a processor that can convert 2D to 3D on the fly. (Ethan Miller/Getty Images)

Despite a rough start to the year, a market rally that began in mid-March has made 2009 a very fruitful year for every sector's respective exchange-traded fund (ETF) - almost. A couple of sectors have quietly lagged the rest of the market over the last several months, and by more than just a little bit. Those same sectors, however, are also starting to act ready to take the market by storm in 2010. It may be time to start shifting things around.

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A look back As of the time of this writing, the Technology Select SPDR Fund is the market's winner for the year with a 45-per-cent gain year-to-date. The Materials Select Sector SPDR Fund is a close second with 43 per cent in 2009. No other sector was in contention to win the race. And just for perspective, the S&P 500 Depositary Receipts are up 23 per cent for the year.

The strength in the basic materials sector is no surprise. Gold futures ran to all-time highs in 2009, and low interest rates coupled with a U.S. Federal Reserve that flooded the economy with dollars primed the inflation pump. Since inflation directly affects basic material prices, savvy investors sought the stocks, expecting better margins when/if inflation finally hits. Thus, the Materials Select Sector SPDR Fund made its way higher.

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Surprise Winners and Losers Technology's strength may be a bit more surprising. The group has still earned top honors, as it didn't get rocked as harshly in the first quarter when most other groups were becoming unraveled. And, the Technology Select SPDR Fund has made well-paced (read "sustainable") gains, proving that slow and steady wins the race.

Yes, at one point financials were red hot, fuelled by economic recovery hopes. But, a significant pullback in the first quarter and a major headwind in October knocked the Financial Select SPDR Fund out of the full-year race.

At the other end of the spectrum you'll find telecom and utilities. The Telecom HOLDRs Trust is up about 2 per cent for the year, and the Utilities Select SPDR Fund isn't much better off with its (roughly) 10-per-cent gain.

So utilities and telecom stocks and ETFs should be avoided, since they're lagging so badly? Not a chance. This is where things get interesting.

A Look Ahead Though tech and basic materials are going to be the champion and runner-up for 2009, neither has done all that well over the last four weeks - each has returned only about 2 per cent. And what about the telecom and utilities fund? They've led the market for the last four weeks, with an 8-per-cent and 9-per-cent gain respectively. More importantly, telecom and utilities have been leading the market for the last several weeks.

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What gives? In simplest terms, it's sector rotation. Nothing lasts forever, and sectors fall in and out of favor. Were it just a couple of days' worth of outperformance, it might be dismissible. XLU and TTH, however, have been a little too persistent over the last four weeks to simply chalk it up to luck; the steady climb in the face of a headwind is the kind of turn you see when new, longer-term sector trends continue.

Move Aside 2009
In this case, both uptrends and the new relative strength of 2009's former losers have great shots at being very rewarding in 2010. The scenarios are certainly optimized to that end.

In the case of utilities, the suspicions are that utilities are starting to outperform for defensive reasons. The timing makes sense, too. With some growth sectors already sitting on record-sized gains since March, there may not be a lot of upside left to go until the economy takes the next step and reduces unemployment. Factor in the ever-strengthening possibility of a rate hike, and utilities stocks start to look better still.

Though to a lesser degree, the same "value/safety" philosophy applies to telecom stocks - a group that's considered to pale in comparison to other areas when times are good. When times are iffy and growth slows though (as they may well be now), that boring stability - and their dividends - fall into favour.

The Bottom Line
The proverbial cyclical planets seem to finally be lining up for two groups that couldn't interest anybody last year.

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