Technical Clues From An Uncommon Source: The Dow Jones Utilities

The Dow Jones utilities average is generally not considered one of the basic barometers of the stock market. While the industrials and transports are barometers in that their price action reflects the ebb and flow of future earnings, the regulated growth characteristics of the utilities lessen their significance as an overall barometer of future business activity.

The utilities average does have a special significance, though, as a barometer of interest rates. Since the utility industry has traditionally been capital intensive and highly leveraged, and with the shares affording yields competitive with fixed-income investments, the utilities are particularly sensitive to changes in interest rates. As the 1994 decline in overall stock prices is largely a result of interest rate tightening, some clues as to outcome may be afforded by the action of the utilities.

In terms of furthering an analysis of the stock market’s primary trend, a study of prior periods when interest rates were being increased to squeeze the economy might prove worthwhile. One such period with similar characteristics to today’s climate was the stock market’s extensive decline in 1984.

I’ll then narrow the focus and discuss the current technical trend of the utilities average, from an intermediate standpoint, as any change in the primary trend has to begin with a change of the intermediate trend moving from bearish to bullish.

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