Are Utilities Poised For A Solid Move Higher?

By Jim Donnelly, Olson Global Markets

In light of the sunset provision in the law that had reduced taxes on dividends and capital gains during the Bush Administration, one might expect a reduced enthusiasm to own dividend paying stocks going forward. The Obama Administration, however, appears likely to align tax rates on both dividends and capital gains to 20% from the current 15%. Although not yet voted on by Congress, this is much less ominous than the concern that they could rise to 39.6% and 20% respectively.

Another factor to consider is the growing notion that austerity measures being taken in Europe and in many States and municipalities through the U.S. will result in a prolonged non-inflationary slow-growth period. If so, income producing vehicles of all kinds should remain in focus, particularly for cash starved pension plans and retirees who rely on interest and dividends for their day-to-day needs.

This assessment could be why the Dow Jones Utility Index (DJU) appears to be forming a bullish reverse Head & Shoulders pattern on weekly bar charts. Interestingly, a very similar pattern formed during 2002 and 2003 at lower levels that corresponded with a higher inflation environment.

In this case, a break above “neckline” resistance at the 408 level could lead to a solid extension up to the 525 area on the Dow Jones Utility index. Near-oversold conditions are currently present, which suggests that a move of that magnitude is clearly possible.


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