Right now we're in the middle of a huge market rally -- especially in
technology stocks. The main motivation is that people are looking for the
quickest way to recover the huge losses they've incurred over the last 18
months. Tech looks like the fast track.
There are two flaws in this reasoning. First, you don't have to make your
money back in the same investments in which you lost it, and second, technology
stocks are still overvalued -- particularly after this rally.
At this point, the technology rally is still a self-fulfilling prophecy. The
belief that tech is the place to be is drawing new money into the sector which
is driving the stocks up -- which is making people believe that tech is the
place to be. This trend can go on quite a while; that's what caused the last
bubble. The question is: Do you want to try to ride that wave of momentum,
hoping you're quick enough and smart enough to know when to jump off? Or, would
you rather catch the next wave -- one that is based on more rational valuations?
Income is King
I can see where that next wave is forming. With bonds and money market rates
at decades low yields, and with the market getting ever more turbulent in a very
cloudy (at best) economy, people are going to be looking for investments that
show a definite return. That investment right now is the utility sector. A
couple of years ago when you could make 30% returns by speculating on anything
with a dotcom on the end, no one was interested in stocks with a 4% yield and
good long-term total return. Now, however, more folks are seeing the light, and
still more will after a few months, when they again get burned in the current
Adding more fuel to the utility story is the fact that brokerage firms have
been anticipating demand in the sector by buying up shares while prices were
depressed. Now the major brokers are putting on a big push to sell utilities,
since they already have a big inventory of shares purchased at low prices. It's
basically a wholesale-to-retail business.
Get in at the Beginning
Usually I'm saying don't buy what the brokers are trying to sell you, because
they're driving up the price as they unload it on you. But in this case, the
stocks are still low enough, and still have attractive enough dividend yields,
that the price is right. Moreover, if you buy them now, you can ride the wave
up, as more and more investors seek the shelter and security of dividend paying
I'll be recommending two utility stocks in my Insiders PLUS
newsletter this week. Both have good yields and a solid operating base from
which to earn steady profits, regardless of whether the recession worsens.
That's the kind of security we all need in this kind of market.