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There’s ongoing potential in tech and consumer discretionary heading into first-quarter earnings season, says market strategist Andrew Burkly. However, he suggests that investors holding a materials-sector ETF rotate out of that holding.

Kate Stalter: Today, I’m speaking with Brown Brothers Harriman market strategist, Andrew Burkly.

Andrew, as a strategist, that suggests that you would be the big-picture guy. The markets are pulling back today, as we speak. What exactly would you say to MoneyShow.com listeners who are wondering what is the best thing to do in their account? Because plenty of people still have painful memories after 2008.

Andrew Burkly: Yeah, absolutely, Kate. I think the question people are asking themselves is: “Is this just the pause in this decent equity rally we’ve seen, certainly year to date and for the last six months, or is it something bigger?”

And something bigger may be more like what we’ve gotten used to over the past couple summers, when we get into that seasonal weak period. And we see corrections that are more like 15%, 20%, and a little scarier, because you get a lot more volatility and the market is a little more abrupt on the down side.

Basically, that’s not what we’re looking for this year. We’ve been saying that we think 2012 is not going to be a repeat of 2011 or 2010 in that regard, meaning that we think the pullback we’re going through now, in terms of stocks, is going to be a little bit more orderly—less violent, less volatile. And ultimately, it’s going to be something to buy into, not something to be afraid of.

Kate Stalter: As we’re speaking this week, earnings season is about to kick off. We’re talking before Alcoa (AA) reports, but this interview will run after that report. What are some of the pitfalls, perhaps, or even some of the upsides that you see as we go into earnings season?

Andrew Burkly: As we go into earnings season, there are two or three things that I’d point out. The first thing that I’d point out is that the year-over-year comps are getting more difficult. So we are further into this business cycle, we are further into this stock market cycle.

We’re now well past the three-year anniversary of the bull market, so corporate profits are going to slow, in terms of year-over-year growth. The first quarter looks like it will barely be positive—maybe about a 1% bump is kind of the expectation. And honestly, we think that expectation is too low, meaning that analysts are a little too pessimistic in terms of their earnings growth assumption.

We do think you’re going to get a pretty good beat rate, where earnings are probably going to grow more like in the 5% range. Which isn’t dynamic, but it certainly is better than expectations. So, that’s one point.

I think the second point is, if you look at just some of the early companies that have reported so far—and you know, there’s about 25 S&P 500 companies that report before Alcoa—the upside surprise ratio there has been about 70% of these companies have beat their initial estimates, which is usually a pretty good precursor for the rest of the earnings season.

So again, we think, relative to the fourth quarter, the first quarter is going to be a little bit better.

Kate Stalter: Let me follow up on that then, and let’s talk about where you see potential strengths in some industries or sectors.

Andrew Burkly: Yeah, in terms of leadership areas, there are two that we continue to look at, and it’s technology and consumer discretionary. And we would really characterize those two as kind of the leaders of this bull market over the past couple of years.

Certainly, technology is one that, again, in the environment where the overall market is going to do very low single-digit earnings growth, technology is actually going to come in much in higher than that, probably in the high single digits through the low teens, in terms of year-over-year growth. So it’s still an area that seems to be growing its earnings faster than the overall market.

One of our favorite Sector SPDRs is the Technology Sector SPDR (XLK). So that’s one, again, as we see a little bit of a pullback or pause in the market trend, that’s a leadership area that we would recommend buying into for further advances.

Kate Stalter: And how about on the consumer discretionary side…any particular ETFs?

Andrew Burkly: Yeah, we would look at the big cap one again, which is the Consumer Discretionary Sector SPDR (XLY). You know, it’s very broad-based in terms of its constituents.

Again, it’s another area that’s kind of showing leadership over the past couple of years. We think consumer’s going to continue to do well in here. We’ve seen income starting to pick up a little bit, we’ve seen spending start to pick up a bit. The jobs data was a little soft on Friday, but the underlying trend, in terms of the labor market, still looks pretty good.

In particular, in there, retail looks pretty intriguing to us. I don’t know the actual, the retail ETF offhand but, that would be one that we would be looking at as well. [It’s the SPDR S&P Retail ETF (XRT)—Editor.]

Kate Stalter: Now, how about areas where people might want to reduce their exposure? Anything come to mind?

Andrew Burkly: Yeah, I think materials is probably the area that we’re most concerned about and, really, because materials is very leveraged to the global plays and China, especially. And we’ve seen metal prices that have been very, very weak and, probably, have some of the toughest comps year-over-year vs. the first quarter of 2011.

So materials is actually supposed to post the most negative year-over-year earnings growth of any of the ten sectors. So, something like the Materials Sector SPDR (XLB) would be an area that we would recommend using for a more of a funding idea. Rotate out of that, and look to get into something like technology or discretionary.

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Tickers Mentioned: XLK, XLY, XRT, AA

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