Utilities And Bonds
by John J. Murphy
Of all the interrelationships between markets, one that has been taken for granted for decades is the
relationship between the Dow Jones Industrial Average and the Dow Jones Transportation Average.
John Murphy, veteran technician and leading proponent of intermarket analysis, points out that the third
Dow Jones average, the Dow Jones Utility Average, can be used for forecasting purposes for stocks as
well as bonds. Murphy explains.
One of the basic premises of the Dow theory is that the Dow Jones Industrial Average (DJIA) and the
Dow Jones Transportation Average (DJIA) should always trend in the same direction and confirm each
other's moves. The third Dow Jones average, the Dow Jones Utility Average (DJUA), also has valuable
predictive qualities not only for stocks but for bonds as well. The utilities usually act as a leading
indicator for the stock market at tops and bottoms. This tendency for the utility stocks to lead the rest of
the stock market is based on their strong ties to the bond market.
My article in June showed how the bond market usually acts as a leading indicator for stocks. This time, I
will try to establish the link between the utilities and the bond market and then show how certain utilities
often act as a leading indicator for bonds.
Figure 1 compares the DJUA with bond futures from 1988 to May 1992. A strong visual correlation can be
seen between the two markets and their tendency to peak and trough together. Note the simultaneous
bottoms in 1988, the peaks in late 1989, the bottoms in 1990 and 1991 and the concurrent peaks in early