If you own good, boring dividend stocks, the last 18 months have been rough.
You did the smart thing.
You bought companies with great earnings and a steady dividend stream, the kind that pay you over 20 years. And they’ve been sucking wind like me in a 5K race.
But something changed this week.
Wholesale inflation came in at double what economists expected, and money didn’t hide in Big Tech. It ran into bonds, and I haven’t seen money do that all year.
I think that’s a sea change for rates, and for the stocks you’ve been stuck holding.
I’ll show you exactly where I’m taking profits on my bond trade, and the chart that says the boring trade is coming back.
They’re Taking The Nasdaq Out To The Woodshed
The Producer Price Index, which tracks what businesses pay for goods and services, rose 1.3% in September. That’s more than double the forecast and the biggest monthly jump since March 2022. Year over year, it’s up 6.3%.
Six months ago, a number like that would’ve tanked bonds. Instead, the 10-year Treasury yield fell from as high as 5.35% last Thursday to about 5.05% on Thursday morning. When yields fall, bond prices rise.
Think about how we’ve traded all year. Hot inflation would kill industrials and kill the bond market, and money would hide in about 20 heavy tech stocks. Over the last two days, that flipped, and the Nasdaq got taken out to the woodshed while the Dow and the equal-weight S&P 500 led.
“Mark, Where Do I Start Taking Some Money?”
Last Thursday, I went strategically long TLT across my services, mostly through November and December calls. TLT is the iShares 20+ Year Treasury Bond ETF, so it rises when long-term rates fall. A call option gives you the right to buy at a set price before a set date, so it gains as the price climbs.
People are asking me, “Mark, where do I start taking some money off?” My answer is right here, with TLT around $80. I’m taking off about 20% to 25% of my bond exposure.
I still think there’s big upside. I think the 10-year is heading below 5%, and if we get there, you’ll have TLT back at $81 to $82. That’s probably where I take off the bulk of my long positions.
This is two days of trading.
If the next inflation number runs hot and bonds sell off again, those TLT calls lose value fast, which is why I’m taking some off the table now. The Fed also meets Oct. 27 to 28, and a rate hike is still on the table.
The Boring Has Been Punished
Look at the Invesco S&P 500 Equal Weight ETF (RSP). It holds every stock in the S&P 500 in the same amount, so a utility counts as much as Nvidia.
Since Aug. 13, RSP is still down a full 10 bucks, at around $214, while the S&P 500 sits barely off its all-time high. Hans Albrecht, our head of income trading, pointed out that the number of stocks keeping up with the index hit something like a 28-year low.
If bond rates come down, equal weight and the Dow look strong, and Hans likes how RSP’s 90-day moving average is curling up.
I asked him whether there’s been a better time in the last six months to take a hard look at dividend names. “I think it’s a fantastic time, Mark,” he said. “I think it could be a generational opportunity.”
That trade will come to the forefront. Over time, everything equals its way out.
Your only option,
Mark Sebastian
P.S. While you wait for the boring names to catch up, you can make money creating income around them. Hans puts out a monthly dividend portfolio report on the stocks he’s watching, and he meets with members live every month.