Energy Exodus Into Other Dollar-Sensitive Sectors Likely Has Legs

Despite rising oil prices and a continuation in the recent trends of dollar weakness that have encouraged commodity speculation, investors have decided that enough is enough -- at least for now -- for energy stocks. So far in April, the sector has lagged, with the return at 0.14% compared to 1.62% for the market. While the rotation is most obviously into healthcare, which I called out earlier this month,and is up an impressive 4.73% this month, this big-money trade is also helping technology and consumer staples. And it's not just a large-cap trade, as smaller energy stocks are actually down on the month (-2% for the S&P 600 Small-Cap and -1.6% for the S&P 400 Mid-Cap).

I detailed my concerns with the energy sectorearly last week, when I called for a 10% pullback. Given how bullish I am (still expecting 1500 on the S&P 500 at some point this year, as I first shared in early October), that's a pretty gutsy call. It may not play out exactly as I described. Instead, energy may just reverse out some of its excess performance relative to the rest of the market over the past year, as investors shift to other sectors and energy stocks consolidate. I continue to find value in the largest energy names and expect, as we are already seeing, some of the smaller and some of the more aggressively priced names to underperform.

Why are investors buying into healthcare, consumer staples and technology? My working theory is that they are appreciating the high exposure to the rest of the world, given how weak the dollar has been. It's certainly showing up in the earnings calls that I have heard so far. At least for healthcare and technology, the commodity price pressures aren't as impactful, given the generally high gross margins ... though that's not necessarily the case for consumer staples.

Subscribers to both my model portfolios are well positioned for this move. In the Conservative Growth/Balanced model portfolio, we cut our position in Chevron (CVX) in half and have really bulked up on large-cap technology and healthcare. Our current exposure to energy is just 4.5%, while technology is 27.4% (Intel (INTC) is the largest position) and healthcare is 22.1% (Becton Dickinson (BDX) is the largest position).

As an aside, we have no large-cap industrials; I feel like the sector is somewhat overvalued, with more attractive options among smaller names.

In the Top 20 model portfolio, we have a lot more large-caps than I typically would like to admit to owning, with big tech names accounting for 16% (and technology in total adding to 30%) and healthcare names accounting for 11.8%, including Johnson & Johnson (JNJ), which has rediscovered its pulse. I continue to find a lot of value in smaller industrials: They make up over 21%. Our energy exposure is a single shale gas player that makes up just 2% of the portfolio.

April has seen a big shift in momentum, and I think things might get worse for energy, especially those companies that aren't large-cap integrated companies (which are still quite attractive). Weaker energy prices will likely hurt energy stocks, but they could fuel demand for other companies.

Disclosure: Long INTC and JNJ in both model portfolios at Invest By Model and BDX in the Conservative Growth/Balanced model portfolio