Just like the government's cash for clunkers program, investors are ready to cash in junk stock holdings for sounder equities, analysts say.
The stock market is up 57 percent since March 9, led by so-called junk stocks -- or badly beaten names with hazy growth prospects. Many of have been in the financial sector, which has lifted the S&P Financial index by 146 percent since the March lows.
But few believe the junk rally can be sustained. Analysts say the mantle will need to be passed from financials and other high fliers to underperformers that actually have stronger growth potential in the coming quarters.
Many of the laggards are in defensive sectors such as healthcare, telecommunications and consumer staples. The sectors sport lower price-to-earnings ratios than both financials and the overall S&P 500, which looks expensive after the momentum-driven run.
Of the 10 major sectors in the S&P 500, telecoms, consumer staples, utilities, energy and healthcare have all underperformed the rally, showing gains between 23 percent and 33 percent.
Whenever you see a sustained bull market advance, you tend to see a rotation from the best-performing groups to the lesser performing groups, said Gail Dudack, chief investment strategist of Dudack Research Group in New York.
Some analysts say the rotation has already started, however tentatively. The expectation is that a superior outlook for earnings, lower valuations and safer revenue streams will feed investor appetite for the stocks as financials and discretionary names lose luster.
There are the beginnings of a movement into more defensive groups, such as consumer staples, healthcare, and other late-cycle stocks that could last many months, said RBC Wealth Management analyst Bob Dickey in a recent note.
Since September 16, the S&P 500 has dropped 0.7 percent, while consumer staples are up 0.9 percent and healthcare has slipped 0.9 percent.
Some of the best value is in technology and healthcare, especially the large cap, and staples as well, Dudack added.
One measure of valuation, called the PEG ratio, suggests that healthcare, consumer staples and technology are the most attractive. The PEG takes the price-to-earnings ratio and divides it by expected earnings-per-share growth.
The measure attempts to compare companies and sectors with differing growth rates. The lower the number, the more attractively valued the sector.
The forward 12-month PEG ratio for consumer staples is a relatively low 1.4, while healthcare and tech are both 1.5, according to Thomson Reuters data.
By this measure, financials are overvalued, with a ratio of 2.9. P/E ratios in the sector aren't terribly stretched, but growth expectations are low, making the stocks look expensive, according to analysts.
Things like healthcare and staples possess the things the market has neglected, and that is stable earnings (and) good balance sheets, said Terry Morris, senior vice president and senior equity manager for National Penn Investors Trust Co in Reading, Pennsylvania.
Those you can find in all sectors. It's just that they seem to dominate in the staples and healthcare.
To be sure, financials and other momentum-oriented names have been expected to falter for a while, and they have not. Since September 16, the S&P Financial index has continued a run, recently hitting its highest level since November 3, 2008, due in part to a 16 percent gain in American International Group Inc and General Electric Co have PEG ratios of 3 and 2, respectively. These aren't usually points that you want to start buying, these are points that you want to start selling stock, he said.
(Reporting by Chuck Mikolajczak; editing by Jeffrey Benkoe)