Will Tech Stocks Ever Turn Around?

It's no surprise that the technology sector is suffering through a dismal earnings season. Companies are shedding jobs and cutting costs while consumers are buying fewer new cellphones, PCs and other gadgets. That hurts everyone from chip makers to hardware manufacturers to software developers.

The good news is that tech historically leads the broad market out of severe downturns. The bad news? We're nowhere near the bottom. Oh, and this strange and scary investing landscape makes historical comparisons of questionable value, anyway.

The last recession was triggered by the tech sector’s implosion. True, tech fell very far very fast, but when it rebounded it took off with an outperforming vengeance. Take a look at this chart of the Nasdaq Composite Index vs. the S&P 500 from the time tech bottomed in early October 2002 to today:

* NASDAQ VS. S&P 500 -- OCT. 9, 2002 to TODAY
Source: BigCharts.com

Tech easily outpaced the broad market for years. When the bubble finally popped in October 2007 the Nasdaq had a lead of more than 50 percentage points over the S&P 500. A repeat of that past performance would be a great relief for tech investors. Alas, they should be prepared to wait a good while, says Rob Enderle, president of Enderle Group, a tech advisory firm in San Jose, Calif.

"We are clearly nowhere near the bottom," Enderle says. "If I could articulate the consensus of industry analysts it would be that most of us think we won't come out of this until maybe the middle of 2010."

True, pillars such as International Business Machines (IBM) and Hewlett-Packard (HPQ) are standing tall, but that's because of contract services work that provides steady, predicable business. Apple (AAPL), meanwhile, has held up well because of superior marketing. But those guys are among the outliers. For everyone else it's catch as catch can.

On the consumer front, people are rightfully afraid of spending parts of their vulnerable paychecks on new gadgets. As for the enterprise side, companies are supposed to invest in technology to cut costs and gain a competitive edge. That's not the case these days, where too many companies are merely fighting for survival. As Enderle puts it: "If you are trying to figure out how to keep your doors open you are not buying a whole lot of IT."

Joe Clark, managing partner of Financial Enhancement Group, a financial planner in Anderson, Ind., says it's imperative that investors accept that consumers and businesses are undergoing a complete change of mindset.

"We have had a fundamental shift to a needs-based economy from a wants-based economy," Clark says. "When you have needs, you're forced to spend whether you want to or not. When you have wants, you can delay that purchase. And that's what everyone is doing ."

Clark adds the current global recession and the Obama administration's proposed trillion-dollar spending plan is like nothing we've ever seen, making comparisons to past market action possibly fruitless. "Investors have to deal with a shift not only in fundamentals and technicals, but suddenly they have to pay attention to government action -- or lack thereof," Clark says.

If you can lock up some cash for three to five years and be truly fearless with it, names such as IBM, Apple, Hewlett-Packard and Research in Motion (RIMM) look intriguing, but it's not like those ideas are big secrets.

"Apple's pretty interesting and the chances of doubling your money there are pretty good," says Bernie McGinn, founder and CEO of McGinn Investment Management. "But then everybody is talking about it, too."

The bottom line is that the bottom for the tech industry looks to be a good year to 18 months away, at least. The stocks will move first, naturally, as they are forward looking, but there’s still no need to jump into the sector right now.

And if you simply can't resist adding a chip of tech exposure to your portfolio, try a broad tech ETF like the PowerShares QQQ (QQQQ). It's cheap, liquid and -- most important -- diversified. Those are qualities you'll appreciate during what promises to be a long and volatile ride.