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Dow Jones Utilities Average flashes short-term sell

Overlay of Dow Jones Utilities and Industrial Averages
Overlay of Dow Jones Utilities and Industrial Averages
Commodity Systems Inc. and Jim Mosquera

The Dow Jones Utilities (DJU) is one of what I will call the big three of the Dow Jones averages. The others being the Dow Jones Transportation (DJT) and the Dow Jones Industrial Average (DJIA). The DJU consists of 15 utility companies, mostly of the electrical variety. In this list you will find stalwarts such as PG&E, Southern Companies, and Duke Energy Corp. Both the DJU and the DJT represent a narrower group of stocks (15 and 20 respectively) than the DJIA, which consists of 30 companies.

It is useful to examine the behavior of all three indices, since in this analyst's estimation, there should be positive correlation between the three when markets exhibit a convincing trend in either the up or down direction. The attached figure illustrates the relationship between the DJIA and DJU over the course of the past 6+ months. I have drawn red ovals at the bottom of this combined DJIA/DJU chart to highlight periods where there has been divergence.

  1. November 2013 - The DJIA continued to rise while the DJU fell. Eventually the DJIA moved in sympathy with the DJU and fell to a make a low in mid-December.
  2. January 2014 - The DJIA experienced a rough month while the DJU increased.
  3. February 24, 2014 to present - The DJU made a top and headed down while the DJIA rose.

The mid-December low was significant and formed the basis of our watch point for a sell indicator in the DJIA on an intermediate term basis. Our proprietary indicator flashed a short-term sell in the DJIA by early January and the subsequent market sell-off certainly validated this conclusion. Since the intermediate term indicator was not activated, we could only conclude that the sell-off in the DJIA was something that would last a few weeks only. That was validated as well. The DJIA bounced hard off the February 3rd low. The DJU merely continued its ascent that started in mid-December, that is until February 24th. Since that date, the DJU made a top while the DJIA continued higher. Moreover, the DJU flashed a short-term sell signal this week! Again, this signal suggests a sell-off in the DJU lasting a few short weeks. Longer-term signals have not given a sell indication. Consider, however, that unlike the DJIA, the DJU made its last major high on 4/20/2013.

So what should we conclude from the data above? If you believe in the Dow Theory, popularized by Charles Dow (first editor of the Wall Street Journal and founder of Dow Jones and Co.) the following tenets give a broader understanding of these averages:

  • Stock market averages must confirm each other - If a new high occurs in one average it should occur in the other, perhaps not on the same day but within a reasonable time.
  • Trends are confirmed by volume - higher prices should imply greater trading volume. I wrote about this in another article.

The DJU made its last major high 10 months ago while the DJIA continued higher. This a long period of non-confirmation. DJIA volume decreased as the market rose and conversely, it increased as the market fell. A broader examination of DJIA and DJU price patterns shows very sympathetic movements over the last 20 years. The non-confirmation periods can certainly occur at any time but I highlighted 3 just in the course of the last 4 months. The last time such a broad divergence occurred was near the stock market top of 2000.

As they say during elections, "only 10% of the precincts are reporting". The precincts are in the early stages of electing a bear.

Jim Mosquera is the author of E$caping Oz: Protecting your wealth during the financial crisis and is a principal at Sentinel Consulting, a business restructuring, debt mediation and capital acquisition firm.