Stock profit-takers have a target-rich environment

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If the stock market finally is primed for a significant pullback after summer’s powerful rally, which sectors are most vulnerable?

A logical assumption would be that the stocks with the greatest gains this year have the most to give back, at least in the short run, if investors rush to lock in profits.

That certainly has played out in the case of China, the only major world market that already has fallen into bear-market territory (meaning a drop of 20% or more). The Shanghai composite index, which surged more than 90% from year-end to its recent high on Aug. 4, lost more than 23% from that high through Monday.

The average China-region stock mutual fund available to U.S. investors still was up 43.5% year to date through Monday, the last day of August. And this week Chinese stocks have rebounded for the last three sessions as buyers have returned, cutting the Shanghai index’s loss since Aug. 4 to 18%.

Emerging markets in general have posted far bigger gains this year than developed-country markets, as investors have bet that many of those emerging economies won’t be down for long. There also has been a coiled-spring effect at work in developing markets after their heavy losses in last year’s global meltdown.

The average emerging-markets stock fund was up 49% year to date through Monday, after diving 55% in 2008. The dollar’s weakness against other currencies this year has added to foreign-stock returns for U.S. investors.

Another leading sector this year: technology, with the average tech-stock mutual fund up 39.4% through the first eight months compared with a 14.6% total return for the average Standard & Poor’s 500 index fund.

Many tech companies have what investors now prize: low debt, high cash levels and prospects tied more to business spending than to consumer spending.

That also raises the question of whether investors will be quick to part with tech in a market sell-off, unless all hope of an economic recovery goes out the window.

Farther down the fund-sector performance chart, small- and mid-sized stocks generally have rallied more sharply than larger stocks this year -- the usual pattern when investors become willing to take on more risk. Small-cap value-stock funds, for example, were up 20.3% on average through August, compared with 13.7% for large-cap value funds.

So far in the pullback that began late last week, the Russell 2,000 small-stock index has fallen 4.8% compared with a 3.5% drop for the big-stock S&P 500.

One strong fund sector that may benefit from a broad market pullback: gold-oriented funds, which mostly own mining stocks such as Barrick Gold and Goldcorp. The miners rocketed on Wednesday as gold soared $21.90 to $976.60 an once, a three-month high.

Then again, many mining stocks already have performed much better than the metal itself this year. At $976.60, gold is up about 11% since Dec. 31. The average gold mutual fund was up 25% through Monday and padded that gain on Wednesday.

-- Tom Petruno