Related topics: stocks, financial services, investing strategy, energy, Anthony Mirhaydari

After going into hibernation for much of the year, the U.S. economy is roaring back to health. Stocks are on the move. Job creation has picked up. Various leading indicators of economic activity are improving. And now, after months of shunning risk and embracing bonds, the average investor is moving back into stocks.

Fund-flow data from the experts at EPFR Global show that investors are putting money to work in American stocks again in the wake of the midterm elections and the Federal Reserve's $600 billion plan to juice the economy. Their research shows that $1.4 billion moved into U.S. equity mutual funds Nov. 3, the day after the elections. This continues a recent turnaround in sentiment that has seen net buying of U.S. stocks for the first time since April.

All of this fits the narrative I laid out in a series of columns over the past few months -- the most recent being "Get ready for an epic bull market" in late September. And that was that the boom in the bond market would force stocks higher. For one, stocks are attractively priced relative to bonds. Two, corporations can use high bond prices to issue low-cost debt and transfer wealth to the equity market via stock buybacks, dividend increases, mergers and acquisitions.

I've heard from many readers who question that narrative. If you're like most people, you're probably sitting on the sidelines, wondering if this turnaround is for real. And -- if it is -- which stocks to buy to take advantage.

I have three picks along those lines, which I found in part using the charting tools on the new version of MSN Money. But first, here's why I stand by this narrative.

Bring on the bull

By the measures most followed by Wall Street pros -- the health of the credit markets, leading economic indicators and readings of long-term stock market breadth -- we are in the early to middle innings of a bull market.

It's important to remember that the economy and the stock market are separate but related entities. Stocks tend to move before the economy. And stocks can improve despite lackluster job creation -- which is why, while unemployment may be the biggest economic problem right now, it's not as big of a problem for the market.

Right now, a flood of easy money from the credit market is propping up stocks, setting the stage for 1980s- or 1990s-like performance in the years to come.

Based on that, where should late-arriving investors focus their attention?

Well, for one, doing nothing isn't an option. With short-term interest rates so low and bond yields scraping the floor, "saving money" in the traditional sense just won't work. Inflation will eat away at your hard-earned cash stashed in a bank or in short-term bonds. And investors in long-term bonds face large price drops as the economy strengthens and interest rates rise.

If you're still worried the stock market isn't attractively priced, consider this: According to Bank of America Merrill Lynch strategists, the earnings yield of the Standard & Poor's 500 Index ($INX)has jumped to 14 times the inflation-adjusted yield on the 10-year Treasury note. That means stocks are earning 1,400% what you would get on the 10-year note, based on Merrill's 2011 earnings-per-share estimate of $90. Normally, the relationship between stock earnings yield and real bond yields is around 200%.

According to Merrill's chief U.S. equity strategist, David Bianco, the only way such a huge advantage for stocks could be justified is if one of two things happened next year: Either interest rates surged or earnings collapsed. But with the Federal Reserve on hold, inflation expectations well-anchored and the economy strengthening again, neither scenario looks likely.

Where to look?

So, with stocks attractively priced even as they push to two-year highs, where do we look for our picks? This may surprise you, but I don't think highflying technology or foreign stocks are the answer.

Yes, technology stocks have been the big drivers of the market's impressive run over the past two months. Off all the major sectors, technology has posted the largest gains: Since Sept. 1, the exchange-traded fund Technology Select Sector SPDR (XLK), which tracks the sector, is up nearly 22%. That's almost twice the gain of the S&P 500.

As a result, Wall Street pros have bought in. Credit Suisse researchers find that small-cap mutual fund allocations to the tech sector have pushed to four-year highs. The increase has been especially noticeable among small-cap value managers, who have focused on highly cyclical hardware stocks.

But the surge in sales of computers and electronic products is beginning to slow. Growth fell from 15.1% in August to 7.4% in September, according to Credit Suisse. Are tech stocks now overbought?

We can actually broaden the question to include the entire "global growth trade," because small-cap mutual fund allocations to both the materials and the industrial sector have now reached mid-2008 allocation peaks. Remember, back then Wall Street was abuzz over the "decoupling" theory, the idea that fast-growing emerging-market economies could continue to expand despite troubles in the U.S. and other developed nations.

We saw a version of this idea take hold over the past few months as U.S. economic growth and job creation stalled. At the same time, emerging market stocks as well as export-focused domestic companies soared. This was fed by the 13% drop in the dollar since June, which made foreign goods cheaper.

But with the dollar now strengthening, the U.S. economy finding its legs and emerging-market economies imposing capital controls and other measures to head off rising inflation, the latest round of decoupling looks ready to end.

Lori Calvasina of Credit Suisse believes that both tech stocks and the global growth trade are in a "potentially overbought condition" and suggests looking elsewhere for returns, including underweight financial stocks or energy stocks.