The “Safe” Sector that Could Cost You a Lot

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But the times, they are a' changin'. What was once considered safe and boring is now exciting and even dangerous. And who else do we have to thank… the Fed, of course, with its artificially low interest rates. I'm talking about the utilities sector… Advertisement China's Long March To World Domination ... Is Coming to An End! After decades of plotting, the eastern giant is finally making its power play ... And every investor across the world is going to feel it. In its most dramatic move yet, China is executing the masterstroke in a 3-part covert operation – one which ends with officials in Beijing dictating U.S. economic policy ... controlling the price of everything from the food we eat to the fuel in our cars ... and, ultimately, leaving the dollar in ruins. This may sound impossible, but it's already happening. Click here now to get the complete, unfiltered story ... Parabolic Moves Never End Well Yield-starved investors have flocked into utilities recently, making it one of the best-performing sectors this year. But there's a big problem. The sector has gone up in a parabolic move, and that never ends well. These kinds of moves happen because investors, fearing they may end up missing the rally, start chasing the price higher. This creates momentum, leading other investors to jump in, which helps push the price even higher. The problem is, the higher the prices move without a correction, the harder they tend to crash. Eventually the market runs out of buyers, prices start to decline and everyone runs for the exit at the same time. That's why parabolic moves usually end in a violent correction. This happened to silver in 2011, when it moved from $27 to $48 in just three months. That same year, it happened to gold when it moved from $1,500 to $1,850 in just two months. And more recently it happened to Apple's stock, when it went from $420 to $620 in three months. In all three occasions, the parabolic move was followed by a correction of at least 20%. Today it's happening again in a sector many investors consider the safest of all: utilities. The chart below shows the price action in the Utilities Select Sector ETF (XLU), which is a basket of utility stocks. This Parabolic Move is Dangerous See larger image Another Reason Why a Correction in the Sector is Likely Because of this parabolic move, many utility stocks are now expensive. The sector has traditionally traded at a discount to the overall market in terms of price to earnings (P/E) ratio. Today, the overall sector is trading at a premium of about 10%. And some stocks in the sector are trading at a much higher premium. For example, let's look at Duke Energy, the top holding of the fund XLU. The stock is trading at a P/E ratio of about 25, a 36% premium to the overall market. Duke Energy's dividend yield also suggests now is not a good time to buy the stock. In general, you want to buy a stock when the dividend yield is higher than its historical average. For example, the chart below shows it was a good idea to buy Duke Energy back in 2009, when its dividend yield was more than 7%, much higher than its historical average of 5%. But right now, the dividend yield is approaching 4%. In the last 10 years, every time the dividend yield dropped close to 4%, the stock suffered a significant correction. Historically Low Dividend Yield Suggests a Correction is Likely See larger image Given the parabolic move and the high valuation of its top holding, it's very likely the fund XLU will suffer a correction soon. My advice to you is to wait for a correction if you want to invest in the sector. How about the long-term picture? Well, compared to the extremely low yields of Treasury bonds, utilities still seem attractive. The utilities sector's dividend yield of 3.5% now exceeds the Treasury yield by almost two percentage points. This high spread will continue to attract yield-hungry investors. For that reason, the sector should do well in the next couple of years. But wait for a correction before jumping in. Best Regards, Evaldo Albuquerque Editor, Pure Income P.S. I want to tell you about the greatest gold threat in the last 80 years. Whether you've got bullions, coins, certificates… it doesn't matter. If you hold gold in any form, it could be in grave danger. Jeff Opdyke has conducted exclusive research, and the results are startling. His research alerts you to an alarming attack, one which could rob millions of innocent, unsuspecting Americans of their gold without notice. To ensure this doesn't happen to you, Jeff urges you to read this briefing right away. Related Reading: Friends Don't Let Friends Invest in Bubbles The Last Time This Happened, the Market Crashed TODAY'S EDITOR Evaldo Albuquerque Evaldo's Retirement Strategist is a dynamic investment product aimed at adapting to ever-changing economic and market environments. It is the perfect product to help you profit from booms and protect you from busts. Click here for details. BECOME A SUBSCRIBER When the next economic crisis hits – will you be prepared? As a subscriber to The Sovereign Individual, we will arm you with the tools and strategies needed to prepare and prosper in the months ahead. 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