Will technology lead?

Technology stocks often lead the way in an economic recovery. In theory, as businesses expand management looks for ways to increase productivity, which usually leads to new technologies. And companies will spend money re-energizing the supply chain, often ahead of re-hiring all the staff that was laid off during the downturn. Probably one of the reasons that unemployment is considered a lagging indicator.

Productivity increases are usually the result of better technology. Perhaps new and improved software solutions or faster hardware. All of which augers well for companies like chip maker Intel, database manager Oracle, systems managers like IBM, communications companies like Research in Motion (TSX: RIM) and even Mr. Softie himself, Microsoft.

Already we have seen the enthusiasm return to RIM, on the heels of a much better than expected showing last quarter. Even broader sector indices like the iShares CDN S&P/TSX Capped Info Technology Index Fund (TSX: XIT, recent price $5.92) has climbed more than 40% from the March lows.

With earnings season in full swing, the tech sector will most likely continue to advance, rather than sinking to new lows. Note Intel Corp.’s recent positive performance despite warning that revenue this quarter might be no better than last quarter. When investors can shake off bad news, that is usually a signal of the beginning of a cyclical bull market as opposed to a dead cat bounce.

Obviously you can play this leading sector through the purchase of name stocks. Or you could look at bullish option positions in the broader technology sector using exchange traded funds or options on the funds. Like say, buying calls on a pullback, on broad market technology optionable ETFs.

The Canadian choice would be XIT calls which are trading at reasonable volatility levels, although there is some concern about liquidity. If you want to play technology, take a look at buying the XIT June 6 calls at 25 cents.