The Dow Report: The Dow Jones Utility Average
By Tim W Wood CPA, May 6, 2005
In recent observations I have talked about the breakdown that has occurred by the Industrials and the Transports. I have explained that they have both violated their recent Secondary reaction low points which puts them both "in gear" to the down side. I have also recently received a number of e-mails asking about the strength of the Utility average. Therefore, I want to address the Utilities today.
First, let me say that the Utility average did not come into being until January 1929. Mr. Dow died on December 4, 1902, therefore it is obvious that he did not incorporate the Utility average into his theories. Furthermore, William Peter Hamilton, who served as a reporter under Mr. Dow at the Wall Street Journal and who carried on Mr. Dow's theory until his death in December 1929, obviously did not use the Utility average either.
Robert Rhea then followed in Mr. Hamilton's footsteps. It is very clear in Mr. Rhea's writings that he did not use the Utility average as he constantly made reference to "Both Averages" with charts and tables constructed only of the Industrials and the Transports. Here is what Robert Rhea had to say about the Utility average: "The action of the utility average, started by Dow, Jones & Co. in January, 1929, is ignored in this study. Many students of the market thought that this average, at that time more active than Rails, might supercede that average as a companion to the Industrials in appraising the trend of the market. There was no logical basis for this assumption, and, after four years� study of the daily fluctuations of the utility average, this writer has reached the conclusion that any attempt to use the utility average in connection with the industrial average as a forecasting device would be useless, as will be explained at greater length later on. Then, too, the interlocking ownership of utilities is such that some development might affect the utility average unfavorable even in a period of expanding earnings of the Industrial group. Throughout the years 1929 to 1933, while the Rails and Industrials were confirming each other, any attempt to use the utility average as a substitute for the Rails would have resulted in serious mistakes."
The next prominent Dow theorist was E. George Schaefer. Here is what Mr. Schaefer had to say about the Utility average: "Another change occurred in the Dow-Jones Averages in 1929 when an index of 15 representative utility stocks was added to the industrials and rails. This Utility Average played absolutely no part in the thinking of Dow, Nelson, or Hamilton because there wasn't any. Rhea ignored it, probably because it was not a part of Hamilton's thinking. But, I have found it helpful in my predictions to keep an eye on the Utilities - a conservative group of stocks with a rather persistent record of gradual growth. There have been times of uncertainty and pessimism during primary bull markets when the majority of investors lacked confidence and refused to buy the industrials or the rails. But at such times a careful scrutiny of the Utility Average often disclosed that timid investment money began to filter into conservative utility stocks. This observation has been helpful to me at times in forecasting a resumption of the primary bull market since 1949 when confidence - then apparent only in utilities - was later reflected by up moves in the Industrial and Rail groups as well.
Since the attitude of investors, the results of industry's research, the news, and the economy change constantly, there can never be an average which is perfect or which will or can stay entirely satisfactory for long. For this reason, I watch all the averages, as well as the Dow-Jones Averages, but still I do not expect a high degree of perfection from any of them."
My observation is that when we stand back away from these averages, we see that they all tend to ebb and flow together with major turn points all occurring within close proximity to the turn points of the other averages. This can be seen in the first chart below, which is a quarterly chart of the Industrials, the Transports and in the lower window we have the Utilities. This chart runs from the inception of the Utilities through the mid-1980's and it is clear to see that the general price movement was the same in all indexes. The varying factor was the extent of the moves by the individual averages and the turn points. This created divergences or non-confirmations between the three averages at these major turn points; nevertheless, the general market direction was pretty much the same for all averages. Please understand that because of the time span covered by these charts it is difficult to see the degree of the turns and that we are talking in a broader more general sense here.
The next chart below is a monthly chart of the three averages beginning in 1984. You can see here as well that all three averages tend to move in basic harmony and that at the turn points we tend to see non-confirmations between the averages, but the averages all do move in the same general direction. It's just that the exact turning points are somewhat staggered. For example, the Transports topped out in 1999, the Industrials topped in early 2000 while the Utilities pushed higher into late 2000. Following this top the Industrials and the Utilities bottomed in 2002 and the Transports found their low in early 2003. This is also true with other averages as well. For example, the S&P 500 and the Nasdaq all topped within close proximity to Industrials at the 2000 bull market top and they all bottomed fairly close to one another at the 2002 low.
My belief is that Mr. Schaefer used the Utilities simply as another tool to confirm his read of the Dow theory. I do not believe that Mr. Schaefer tried to incorporate the Utilities into the Dow theory. He just used them very similarly to how I use the Retailers Index as a tool for further confirmation of the original two averages. Also, I want to state that I do not, under any circumstances, believe that the Utility average is a part of Dow theory. This point is very clear from the writings by our Dow theory forefathers. It should also be very clear based on the inception date of the Utility average. I know that some books on technical analysis incorporate the Utilities. The author of any such book is simply mistaken and not truly grounded on the subject of Dow theory.
It is my belief that the Utility average has also been undergoing the rally separating Phase I from Phase II of the ongoing great bear market just as most every other major index has been since the 2002 lows. I believe that the fact the Utilities has been stronger is simply representative of a "non-confirmation" with the other averages. Based on the data at hand today and the normal relationships of the past, I suspect that what we are seeing is a topping out process by the Utilities. Just as in 1999 and 2000, these indexes topped one at a time and one of them always has to be last. At the 2000 top the Utilities were the last to top out. In this case, it is the Utilities that are once again proving to be the last hold out of the three. I believe that we will once again see all three averages "in gear" together in the not too distant future.
Tim W. Wood
© 2005 Tim Wood