The Utilities' big drop

Discussion in 'Wall St. News' started by S2007S, Jun 20, 2007.

  1. S2007S

    S2007S

    MARK HULBERT
    The Utilities' big drop
    Commentary: Dow index correction doesn't mean end of bull market
    By Mark Hulbert, MarketWatch
    Last Update: 12:01 AM ET Jun 19, 2007

    ANNANDALE, Va. (MarketWatch) -- A reader recently took me to task for focusing so many of my columns on potentially frightening developments in the stock market. What am I trying to do, he asked, scare investors out of the market?
    Another reader took me to task for arguing in those columns that many of those developments aren't actually as scary as they might otherwise seem. What am I trying to do, he asked, be a shameless cheerleader for the bull market?
    The answer, of course, is "No" in both cases. But today's column will certainly not help me make my case to either reader.
    That's because I am focusing on a recent development that, on the surface at least, looks very frightening indeed, but which, upon further analysis, is more benign.
    Chart of $UTIL
    I am referring to the correction in late May and early June in the Dow Jones Utilities Average ($UTIL :
    dow-jones utilities index actual values
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    Last: 491.58-11.52-2.29%
    3:49pm 06/20/2007
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    $UTIL491.58, -11.52, -2.3% ) . From its May 22 high of 537.12 to its intra-day low of 485.83 on June 8, this average dropped 9.5%, far more than the loss over the same period for the Dow Jones Industrial Average ($INDU :
    Dow Jones Industrial Average
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    Last: 13,524.46-110.96-0.81%
    3:49pm 06/20/2007
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    $INDU13,524.46, -110.96, -0.8% ) .
    The reason this is potentially so worrisome: Utility stocks are thought to be a good bellwether for the overall stock market. As Richard Russell, editor of Dow Theory Letters, has pointed out numerous times over the years, the Dow Jones Utility Average often hits its high well before the final high of the market as a whole.
    Did May 22 mark the top for this market average? As of Monday night, it had recovered only slightly from its June 8 intraday low, and still stands 6.4% below its May 22 high. And if that high holds, that presumably means that a top in the broader market is imminent.
    To get insight, I turned to Stock Market Logic, the classic book written many years ago by Norman Fosback, currently the editor of Fosback's Fund Forecaster. The bad news is that Fosback found, from his not inconsiderable research into the Dow Jones Utilities Average, that, "it is a valuable leading indicator of the (stock) market's future trend - a real bellwether."
    The good news is that the recent correction doesn't qualify as a bearish bellwether according to Fosback's research into how to make it most valuable.
    For example, according to Fosback, it is "useful ... to compare the current DJUA with the level 15 weeks earlier. If the present reading is higher, utility stocks may be classified as in an uptrend and the stock market should follow upward as well. If the current DJUA is lower, a downtrend is established and the broad market should follow the utilities lower."
    Fifteen weeks ago, the Dow Jones Utilities Average closed at 468.71. Since this market average currently is 7.3% higher than then, the utility bellwether would have to classified as still bullish - the late May/early June correction notwithstanding.
    Fosback also reports on another way of using the Dow Jones Utilities Average as a bellwether that, in his research, "has proven effective." This "entails a comparison of the current Dow Jones Utilities Average reading with the average weekly value of the index over the past year. Depending upon whether the present reading is above or below the one year average, the market's climate is deemed to be bullish or bearish."
    This alternate method also reaches a bullish conclusion currently, since the average weekly value of the Dow Jones Utilities Average over the last year is 460.61. The Dow Jones Utilities Average currently is 9.2% higher than that.
    The bottom line: It will take a lot more weakness in the Dow Jones Utilities Average to turn this market bellwether bearish. End of Story
     
  2. Actually, Hulbert's last statement is a fallacy. If the Utilities were to tread water for the next 8 weeks, the 15 week indicator cited by Fosback would turn negative. A more correct statement: Unless the Utes rally over the next couple months, we will get a bearish signal from this indicator.
     
  3. S2007S

    S2007S


    thats one indicator im closely following at the moment.