HAT WOULD IT TAKE TO CONVINCE YOU that the recent correction is over and it's OK to re-enter the financial markets? A sharp increase in daily volume? A pickup in corporate profits? How about fewer negative earnings pre-announcements?

For many investors, the surest sign would be a return of tech leadership. That makes sense for several reasons:

• Techs led the bull market of the 90s, so it stands to reason they'll lead the charge this time.
• Techs -- especially semiconductors -- are typically one of the best performing sectors when the economy emerges from a recession.
• Technological development continues at a rapid pace, so it's likely that these companies will exhibit some of the highest growth in this decade.

With techs representing such a large percentage of the major indexes, these popular measures of the market have moved in fits and starts along with the gyrations of the tech sector. It's no wonder that investors have looked to techs for an indication of the overall market.

For those using this barometer, the past fifteen months have been extremely frustrating. The bearishness of 2000 has continued into 2001.

We'd argue however, that those who focus solely on techs are failing to see the forest for the trees. Despite the sector's travails, the market is actually acting as it should under the current economic conditions -- and it's not all bad.

Rally 'Round Treasuries

Treasured Treasuries

Source: Baseline When the Fed's tightening started to have an effect on the economy and the stock market, investors fled to the safety of Treasury bonds. As a result, the spread between Treasuries (T10) and investment grade corporate bonds (BONDC) jumped over 1%. Once the stock market started to show signs of bottoming in March 2000, the spread began to narrow.

In the upside-down bad-news-is-good-news world of bonds, the slowing economy, falling interest rates, and the perceived safety of government-backed securities increased demand for Treasuries. Corporate bonds lagged as investors grew fearful of companies' ability to repay debt in an economy teetering on recession.

But now the tide may be turning as the Fed nears the end of the current easing cycle. Treasuries are already starting to come off recent highs. There's no need to price in additional cuts if the Fed is through. Corporates now stand to benefit as spreads narrow in a more stable interest environment.

This is how the fixed income market normally reacts as the economy slows, bottoms, and starts to turn back up. There's nothing unusual or frustrating here, unless of course you're strictly focused on tech stocks.

The relatively low rate of inflation has also been a boon to the fixed income market. Even as the Fed lopped interest rates, inflation has shown only a slight move up.

This, too, is also a normal reaction. As the economy slows, demand falls and pricing pressure declines. When no one wants to buy your products you can't raise prices. The Fed's lowering rates to get the economy moving again and only when they are successful will inflation become a threat. This is the infamous delay between Fed action and the economy's reaction.

The Trees

Actually, it is. Things don't look too good if you're concentrating on previous winners -- especially tech stocks, but if you're willing to expand your investment universe across all sectors, you'll find the market is acting normally.

While it's true that techs are usually early recovery leaders, they may not be this time. First of all, it'll take longer to wring out the excesses of their recent overvaluation. Giddy investors had run them up so high, even after 15 months of declines many are still well above fair value.

Secondly, technology's increased role in business led companies to overspend and overbuild in the 90s. The Y2k threat compounded the problem. As a result, tech's customers have purchased more product than they need and have cut back capital spending accordingly. Demand will return only when this imbalance is removed or the underlying technology moves to the next level.

In a related vein, technology companies have inadvertently inflated supply. In response to the boom of the 90s, many built inventories to meet rising demand only to now find themselves with and oversupply of finished products and parts, many of which are rapidly becoming obsolete. Remember Cisco's inventory charge off?

All of these problems must be worked through before the tech sector can begin to recover. This isn't to say that it won't recover, only that it will take longer than normal to remove these excesses.

Not All Bad

Source: Baseline Techs (SPHTI) may have had a lousy year, but Financials (SPFN), Consumer Cyclicals (SPCCS), and Consumer Staples (SPCNS) are all in positive territory.

These fundamental problems are reflected in the stock prices. Looking at stocks furthest from their 52-week highs in the S&P 500 as of June 25th, techs comprised 14 of the bottom 15 (93%), 40 of the bottom 50 (80%), and 59 of the bottom 80 (74%). At the other end of the spectrum, there were 68 stocks within 5% of their 52-week high, but only 4 (Concord EFS, First Data, Fiserve, and Equifax) were techs.

Seeing the Forest

Obviously these stocks and sectors have some of the best performers over the past several months. These are the very sectors that lead the market when the economy begins to recover from a recession. In essence, the market is acting normally.

Few would argue that Financials, Consumer Cyclicals, or Consumer Staples are nearly as sexy as the tech darlings of the 90s, but that doesn't mean they won't take their turn as market leaders. These sectors are interest-sensitive and outperform when rates are falling and inflation is under control. Like it or not, when economic conditions warrant (as they do now) they're the sectors to own. Contrary to popular belief, the market cycle has not been repealed.

Sure tech stocks will be back and of course you want to buy them when they're cheap. This may be the best buying opportunity of the next decade, but if you focus only on that sector, be prepared to wait. If tech's return to glory is your yardstick of the market's health, it'll be awhile before the patient is released.

In the meantime, other less damaged interest-sensitive sectors will continue to produce better results. This disparity isn't because the market isn't healthy, but rather because it is. It's all a matter of focus.

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