When markets aren’t going too crazy, you can get a good idea of what investment strategy is working best by looking at stocks making new 52-week highs (and 52-week lows).

Since the start of the year, stocks have essentially made a round-trip to break-even. It started with a historically large drop in the first few weeks of the year. While the drop marked the third near-ten percent correction in the past 18 months, it didn’t lead to anything bigger.

Stocks have spent the past few weeks rallying instead.

Most companies are still between their highs and lows of the past 52 weeks. But looking at a list of companies that have been making new highs in recent days, it’s become apparent that the market is still optimistic, but defensive.

That’s because a growing number of big-name blue chip companies have been posting new highs. That includes consumer goods companies, with firms like Coca-Cola (KO) and telecoms like AT&T (T) frequently hitting the list on a weekly basis. Many utilities are close behind as well.

These sectors are all considered defensive in nature. They’re the companies to hold through a downturn if you don’t want to go to bonds or cash. With interest rates still non-existent for most investors, it’s better to earn a 3-5 percent yield in these stocks, even if there’s some volatility.

There’s just one problem with the rally in blue chips—they were never that cheap to begin with. While it usually pays off in the long run to own a best-of-breed company even if it means paying a bit of a premium, the premiums today are now too high for comfort.

The poster child for this surge is McDonald’s (MCD). After trading in a range for nearly three years, the modest success of “all day breakfast” in stores caused the stock to surge from 17 times earnings to 27 times earnings. Store sales didn’t even grow so much as they simply stopped shrinking.

But it’s not the only stock to suddenly break out of a long-lasting trading range. In the past two years, AT&T has traded mostly between $33 and $36. If you bought on the low end of the range and sold on the high end, you could have made 10 percent, plus picked up some dividends along the way.

Now shares are closing in on $40 for the first time in eight years. That’s in spite of the fact that the company bought DirecTV last year and took on a large amount of debt.

Clearly, Mr. Market doesn’t mind paying up for well-known, best-of-breed names right now. It’s better than seeing these companies sell off and a bigger rally in Treasurys and gold. It’s just another confirmation that, despite being pricy, the stock market is still the best risk-adjusted game in town.

High valuations in the blue-chip companies isn’t a red flag. Just a yellow one. If the market continues to rally, traders might want to flip their blue-chip profits and roll the dice on smaller companies that are just now starting to show momentum. Better buying opportunities will occur to pick up quality names at a more reasonable price. Be patient.

Andrew Packer is a Senior Financial Editor with NewsMax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and is managing editor of Financial Intelligence Report. To read more of his work, GO HERE NOW.