TELECOM AND UTILITIES SHOW STRONG CHART ACTION AND CONTINUE TO BENEFIT FROM MOVE INTO DIVIDEND-PAYING STOCKS

BARRON'S ARTICLE GIVES BOTH GROUPS A BOOST... I've written a couple of articles over the last two weeks about the recent move into dividend paying stocks like telecom and utilities. A weekend Barron's article (Even Better Than Bonds) wrote about how relatively low bond yields were pushing investors into higher-yielding stocks. That may account for the fact that telecom and utilities are the two strongest groups today. As is usually the case, however, the charts picked up that new trend first. On November 24, I showed Telecom Holders (TTH) achieving a bullish breakout. Chart 1 is an updated version of that bullish chart which is hitting a new 52-week high again today. The TTH:SPX ratio (solid line) started to turn up a month ago. Chart 2 shows Telecom iShares (IYZ) having achieved a bullish breakout of its own (with a rising RS line). The main reason for that upturn is the strong action in its two biggest stocks -- AT&T and Verizon.

Chart 1

Chart 2

AT&T AND VERIZON BREAKOUTS... My November 24 article showed these two telecom giants close to achieving bullish breakouts. Chart 3 shows AT&T having exceeded its autumn high and nearing a test of last December's intra-day peak at 28.80. Chart 4 shows Verizon having already cleared its December 2008 peak. According to Barron's, those two telecom leaders pay dividends of 6% and 5.8% respectively. Sprint and Qwest Communication are far from their yearly highs, but are also rallying today.

Chart 3

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UTILITY BREAKOUT... Last Tuesday's article showed a bullish breakout taking place in the Utilities Sector SPDR (XLU) both in absolute and relative terms as another example of investors moving into higher-yielding stocks. Utilities are second only to telecom stocks today (in a generally flat market). No doubt, the defensive group is also getting a bounce from the Barron's article. The XLU sports a dividend yield of 4.1% which is better than a Treasury Bond. Five dividend leaders listed by Barron's are American Electric Power, Exelon, Edison Intl, FirstEnergy, and Southern. Chart 6 shows American Electric Power having completed a bullish breakout through 32. Its relative strength ratio (below chart) has turned up as well. The fact that investors are starting to favor defensive, dividend-paying stocks is also a way to participate in the stock rally while assuming less risk. Not only have these stocks been underperformers all year, but any market loss would be cushioned by dividend payments. The same is true for consumer staple and healthcare stocks. It's also a sign that investors are turning more defensive than they've been since the March bottom.

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