Serious Money: European stock markets have continued their recent strong run and many sit at or near three-year highs.

Many major indices are showing double-digit percentage gains year-to-date. Even Italy, Europe's newest basket case economy, has managed a 6 per cent rise.

Against a background of ever-diminishing growth expectations, higher oil prices and renewed global terrorism, we might be forgiven for thinking that equities are going through one of their periodic bouts of madness.

First, it is important to put the current level of equities into some sort of context. While it is great for investors to bask in the healthy rises of the past three years, it remains the case that many of the indices in question are merely back to where they were at the beginning of 1998 - and still a long, long way from the peaks reached five years ago during the first half of 2000.

The FTSE 100, for example, currently stands at around 5,200, up hugely since the depths plumbed at the start of 2003 but way below the peak of nearly 7,000 reached during the technology bubble.

Serious Money has been a cheerleader for German stocks for a while and is happy to report a near doubling of the market since March 2003 but, before we get too confident, we need to remind ourselves that the Dax still stands around 70 per cent below its 2000 peak.

All of this serves to remind us of a couple of basic truths about equity investing. First and foremost, of course, it tells us about the nature of the risks and rewards that are available to us.

Many investment writers are telling us that equity market volatility is currently near an all-time low. While this is absolutely true, in the sense that conventional measures of volatility are very depressed, a looser description of the variability of equity prices over the past 10 years would not use the world "low".

We have previously explored the paradox of Europe's headline economic difficulties sitting alongside unprecedented levels of corporate profitability: European companies have recognised the facts of globalisation even if governments have not. Just imagine what European equity prices would do if growth ever makes a miraculous return to the region's economies. Interestingly, even given the rises in stock prices seen recently, valuations still look extremely comfortable. One of the drivers of market behaviour has been improved profitability as much as expanding price/earnings (p/e) multiples.

So what happens next? The big themes this year have included oil stocks (for obvious reasons), other commodity stocks (ditto) and industrial cyclicals.

The behaviour of the latter is probably the most anomalous, given the macro background, but is more easily understood when we look at the restructured profitability (often in the wake of the activities of private equity investors) of many of those companies. Additionally, many of Europe's industrial cyclicals are exposed to non-European growth, which has been robust to say the least.

One possibility, to which I am attracted, is that all of this simply continues; the sectors and stocks that have done well continue to do so for the rest of the year. But markets, being the capricious creatures that they are, are unlikely to be so straightforward.

There are one or two straws in the wind that suggest investors are looking favourably at the two sectors I most love to hate: telcos and technology.

Sometimes, sectors have a run simply because too many investors (who should know better) think it is their turn. Such sector rotation, historically, can be dramatic but, if it is fundamentally unjustified, ultimately reverses. The tech bubble was the ultimate unsustainable sector rotation.

Since the start of the year, anyone going long on the European oil sector and short on telcos would have made 30 per cent. It has been a long time since such two huge market sectors have diverged so dramatically over such a short space of time.

It would be tempting, but dead wrong, to think that telcos' time has come simply because of this performance lag. But I have to acknowledge that a lot of market chatter is precisely in this direction and telcos could have one of their periodic unsustainable runs.

It is true that valuations of some telecoms companies have begun to look reasonably attractive - but that's on the basis that the current levels of profitability in the industry can be sustained. Regular readers of Serious Money will be familiar with my doubts about the long-term future of the phone business: competition, regulation and VoIP (internet telephony) represent serious structural headwinds. But if phone companies start buying each other to try and ameliorate some or all of these headwinds, the sector will fly.

Tech stocks are being talked about in similar fashion. One or two companies are reporting improving trading conditions and the sector has been another underperformer (at least until recently). Valuations have come back to the point where the bubble has well and truly deflated (but very little can be described as absolutely cheap). If history is any guide, this relatively unsophisticated mix of arguments will be enough to send technology stocks on one of their flights of fancy.

For those of a trading mentality - punters in other words - tech and telcos may be the place to be for the next few months. Anyone willing to hold their noses could find this to be one of those strange times when investing in poor quality, not terribly cheap businesses could make some decent money.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.