Shares of telecommunications stocks such as AT&T Inc. (NYSE:T) have seen quite a rally in recent weeks/months as the desperate search for yield has investors stumbling over each other to bid on high-dividend stocks. While I expect this theme to persist for some time, the rally in T stock looks to be overdone near-term. Active investors and traders should look to short or fade AT&T for a pause or mean-reversion move lower.
Bond yields continue to drop below levels that most analysts didn’t foresee just a few weeks ago, and this has brought about a renewed scrambling for yield in stocks that offer attractive yields relative to bonds. Telecom stocks like AT&T are just one example of yield chasing; others include defensive areas like utilities and even mortgage-backed securities.
T stock currently sports a gross dividend yield of 4.4%, which is awfully attractive compared to the 10-year Treasury’s 1.5%, hence the chasing of the stock.
Two things of note before looking at the chart:
- AT&T is scheduled to report its next earnings on July 21, which is a date for investors and traders alike to circle on the calendar.
- Through a multi-quarter lens, T stock is a trend following stock (higher), but that doesn’t mean active investors can’t make some income trades on the short side once this stock gets overly extended on the upside in the near-term. In fact, even long-only investors could apply simple covered call strategies and alike to capture some additional income when the stock rallies too much too quickly.
AT&T Stock Charts
On the multiyear weekly chart, we can see that after a multiyear range-bound trip, T stock earlier this year began to break to the upside.
This move continues to feed upon itself, but from a momentum perspective (as per the MACD oscillator at the bottom of the chart), this move is now very long in the tooth.
T stock year-to-date has rallied close to 26% and over the past two days alone jumped 2.7%. Note that AT&T has not dropped below its blue 8-day moving average on a daily closing basis since May and is getting notably extended above its yellow 21-day moving average as well.
The slope of the stock has literally gone vertical, and momentum oscillators are in record overbought territories. Active investors and traders now have several ways to play for a pause or somewhat of a mean-reversion lower in the stock. One could either short the stock outright, buy some puts or (my personal favorite) sell out-of-the-money calls spreads using August options.
At the very least, this current rate of change to the upside in T stock is not sustainable, and a pause and possible mean-reversion move back into the $41-$42 area seems likely.
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