Recently I posted about what was going on in the Dow Transportation Average here. and how a Market Technician might form his/her analysis, make investment decisions, and advise clients. Today I will briefly examine the Utility Average and explain why it is so important and often goes overlooked, as well as describe why it is projecting a slightly bullish bias in current market conditions.

The Utility Average has been quietly roaring back..

A Bit of Background

The Dow Jones Utility Average is made up of 15 utility companies that are in the business of electric utilities, gas pipelines, telephone companies, and natural gas. You may see the components of the Utility Average here. Along with the Dow Transportation Average, it is one of the most important averages in existence today, and yet I feel many choose to overlook or disregard it. This is unfortunate for them. The average itself can be somewhat boring by typical investment standards, as it often moves much less than the Industrials and the Transports. Yet it has historically proved to be one of the most reliable barometers of the overall market as well as the Industrial Average itself.

Utility stocks are very sensitive to changes in interest rates because many of these companies require significant amounts of capital to finance their operations, and this means debt relative to equity. Falling interest rates or extended periods of low rates allow these companies to attain favorable financing and this directly contributes to their bottom-line. Not only do utility companies benefit directly from low rates, but the price of their stock benefits indirectly as well. Because utility companies pay out their profits in the form of substantial dividends, they are often compared to bonds. When yields on treasury and other bonds are low, the yields of utility companies relatively become more attractive. The opposite is equally true when interest rates are high and rising; this is negative for utility companies. Perhaps this will give you further additional insight as to why the Feds monetary policy is so important to the stock market, even if conditions may not have changed or appear positive.

A Major Technical Principle

One of the major technical principles that CMTs are taught is that changes in the trend of interest rates usually occurs ahead of reversals in the stock market, and therefore the Utility Average typically will lead the Industrial Average, and therefore the market, at tops and bottoms.

For this reason I consider the Utility Average the stealth average since it often quietly goes about its business at the same time the broad indices are alive with activity and preoccupying many investors time. Is this what is happening now?

Periods When Utilities Lead Industrials at Tops