V.10:9 (379-380): Utilities And Stocks by John J. Murphy

V.10:9 (379-380): Utilities And Stocks by John J. Murphy
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Utilities And Stocks by John J. Murphy

Last month, this technical trailblazer examined how utilities and bonds were interconnected. This month, John J. Murphy analyzes how utilities in turn affect stocks.

My article on utilities and bonds examined the close link between utility stocks and Treasury bond prices. Because bonds usually act as a leading indicator for stocks and because utilities are sensitive to interest rates, it should be no surprise that utilities also provide advance warning about the future direction of the stock market as a whole.

Figure 1 provides a five-year comparison of the Dow Jones Utility Average (solid line) and the Standard & Poor's 500 index (dotted line) from late 1987 to mid-June 1992. Visual comparison permits a couple of observations. First, both lines generally trend in the same direction. Usually, rising utilities are positive for stocks, while falling utilities are usually bearish. However, as is the case with bonds, utilities usually change direction before the rest of the market.

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