Dow Utilities Lead Stocks: A Bear Market In Stocks Is Imminent

April 7, 1999

Although scant attention is usually paid by most analysts to the Dow Jones Utilities Average (DJUA), it indeed demonstrates a respectable record of anticipating important turns in the Dow Industrials Stock Index.

This leading tendency of utility stocks is based on their relatively close ties to the bond market, which is also a leading indicator of stocks. Therefore, the DJUA is defined as an intermarket indicator.

Historic Record of DJUA As A Leading Indicator

Since 1970, five major reversals in the DOW were preceded by a turn in the DJUA.

  • The November 1972 peak in the DJUA preceded a similar peak in the DOW two months later in January 1973. Both averages dropped in the second half of 1974.
  • In September 1974, a bottom in the DJUA preceded a bottom in the DOW three months later in December. Both averages rallied for two years.
  • The DJUA hit a peak in another January 1981, preceding a major top in the DOW three months later in April. Both averages declined together in 1982.
  • The DJUA bottomed in July 1982, preceding a major bottom in the DOW one month later in August. Both averages rallied together until 1987.
  • In January 187, the DJUA hit a major top, leading the peak in the DOW seven months later in August 1987.
     

During these two decades, the DJUA failed to lead a major reversal in the DOW only three times. In March of 1980, both averages bottomed together. In 1970 the DOW bottomed one month before the DJUA. Of the eight major turns since 1970, the DJUA led stocks five times, reversed at the same time once, and lagged only twice. The leading tendency of the DOW at market tops is especially impressive.

Longer-term shows that the DJUA has led the DOW at every peak since 1960 with only one exception - the 1977 peak. During those 30 years, the DJUA peaked ahead of the DOW by an average of three months, although the actual lead time varied from one month to ten months.

What Is the DJUA and DOW Doing Now?

The DJUA peaked in October last year at about 320. Since that time the DJUA fell sharply in January and most of February this year to a low of 286 (down nearly 11% from its peak in 1998). And although it made a valiant attempt to rally, it has resumed its downtrend - and now stands at about 293 (4/6/99) - thus decisively penetrating the 200 Day Moving Average. Historically, this suggests there is a 90% probability stocks will soon begin their own Bear Market decline. Moreover, once the 50 Day Moving Average penetrates the 200, it will have confirmed a Bear Market for stocks.

Since December last when the DJUA began its downtrend, the DOW has continued to rise to its all-time high close of more than 10,000 in late March. If the leading indicator aspect of the DJUA indeed imposed itself once again, the DOW has already seen its peak - as the DOW 10,000 high was make approximately six months from the DJUA peak. A convincing factor which provided further credibility to the DJUA signal is the fact U.S. Treasury bonds also peaked last October (i.e. 30-year bond yields have been steadily rising since then).

Although the DJUA has historically demonstrated amazing consistency as a leading indicator to the DOW, we must remember the average leading time period ranged from one to ten months. It's uncanny that during the last 30 years, the DJUA peaked ahead of the DOW by a leading period from one to ten months - and now we are in the 6th month.

Conclusion -

Premised on corroborating results of the last 30 years, it is highly probable a BEAR MARKET IN STOCKS IS IMMINENT - as long as the DJUA remains in a downtrend - along with U.S. Treasury bonds.

Moreover, the weekly chart of the DJUA has for months been demonstrating marked CONFIRMATION between the its price and several Technical Indicators - which nearly always heralds a price trend continuation (in this case DOWN). The weekly negative indicators for the DJUA are Momentum, MACD and Stochastics.

The question is not "IF," but rather "WHEN" stocks will begin to plummet.

Founder of Gold-Eagle in January 1997.  Vronsky has over 42 years’ experience in the international investment world, having cut his financial teeth in Wall Street as a financial analyst with White Weld. Vronsky speaks three languages with indifference: English, Spanish and Brazilian Portuguese.  His education includes a degree in Petroleum Engineering from the University of Oklahoma, a Liberal Arts degree from Hartnell College and a MBA in International Business Administration from UCLA – qualifying as Phi Beta Kappa and Tau Beta Pi for high scholastic achievements.  Vronsky believes gold and silver will soon be recognized as legal tender in all 50 US states…and many countries worldwide.  You may reach I. M Vronsky at: vronsky@gold-eagle.com and/or vronsky@bellsouth.net

In 1934 President Franklin Delano Roosevelt devalued the dollar by raising the price of gold to $35 per ounce.