Jim Rogers warns technology is heading for a big drop

Billionaire investor Jim Rogers issued another warning to the investors and made the aware that there is a sector they should avoid in order to save their investments. The co-founder of the Quantum Funds with George Soros might made some wrong moves in his career but he has gained fame for some of his warnings. In a 2007 interview with Reuters, Rogers predicted a 40-50% drop inreal estate prices in some areas of the United States and a massive recession across the country. The United States still can not find a way out of this downfall.

Investors all over the world take note when the legendary Jim Rogers makes any market prediction. And the billionaire is now warning that one sector of the market is "priced in lunacy," so he is betting heavily against the group. The sector has seen earnings fall by 4.3% in the third quarter compared with the same period last year, almost double the decline of 2.2% for the overall market. Rogers is talking about technology.

And indeed, there are several reasons the technology sector is due for a correction. The sector outperformed all others during the past four years with an annualized gain of 19%, while the S&P 500Index gained 12% in the same period. This outperform may already be working itself out with a drop of 10% so far this quarter compared with a decline of 6% in the rest of the market.

Of more concern, four years after the financial collapse, U.S. companies have yet to really ramp up hiring. While Europe and China are looking incrementally better, the United States is facing a huge fiscal gap in the coming quarters, with even the most optimistic forecasts only calling for about 1.5% gross domestic product growth. With labor already cut to the bone, companies are putting off improvements in tech spending ahead of the fiscal and economic uncertainty.

One big clue to the level of frothiness in the tech sector could be coming from the rebound in real estate prices in Silicon Valley . Real estate has soared in the tech capital and prices are off their peak by just 1.3% in some cities, while much of the rest of the state continues to struggle with foreclosures.

There may yet be hope for the sector. Tech companies in the United States earn more revenue outside U.S. borders than any other sector, making the tech industry more resistant to fiscal cliff worries and weakness here at home. Revenue should be marginally supported if Europe can stage a rebound or if emerging markets continue their economic march higher.

President Barack Obama will need to barter with Congress if he wants to let the Bush-era tax cuts expire for those making more than $250,000 a year. One possible deal could revolve around another tax repatriation holiday like we saw in 2004. Under a repatriation holiday, U.S. companies are lured to bring foreign profits back to the country by taxing them at a roughly 5%tax rate , rather than the current 35% corporate rate. Because the tech sector has the most overseas revenue, it also has the most cash held overseas, so it could win big with such atax holiday .

In addition, Microsoft launched Windows 8 in October and will stop supporting Windows XP in early-2014. This could reinvigorate the corporate spending cycle for information technology (IT) and services. Further, if demand in fact rebounds, then tech spending usually leads the business cycle because it is easier to buy IT and services than to add staff.

Even Rogers admits there will always be success stories, but the problem is when an entire sector is pushed up without any real difference between the good and the bad. This was evident in some of this year's catastrophic IPOs -- Facebook (Nasdaq: FB) and Groupon (Nasdaq: GRPN).

Investors seem to have forgotten the lessons of the 2000 tech bubble, and are now paying meteoric prices for very little in earnings. While Groupon and Facebook have seen their shares sink since their IPOs, shares of LinkedIn ( LNKD ) are up almost 10% since its offering in May 2011.

There are those risks to be considered: Half of investing is keeping your profits before the bottom drops out of the market. Companies with strong balance sheets and good value should do well during the next year, but may see a short-term drop as investors take the entire sector lower. Investors should be ready for a short decline on sentiment before stronger stocks head higher.

There are some actions one can take. After years of outperformance, the tech sector could be due for a correction, as Rogers expects. You may not want to neglect the entire sector, but be selective and know when to take your money off the table. Given the valuations in much of the sector, investors may want to avoid some of the more expensive stocks and the general sector funds. For those who do not want to completely avoid the sector, look for large-cap companies with strong balance sheets that pay healthy dividends such as Intel.