Dow Jones Utility Index Beginning To Make Its Move Higher

By Jim Donnelly, Olson Global Markets

After a period of consolidation, the Dow Jones Utility Index (DJU) appears to be making its move to higher levels. Earlier in the year, the threat of rising interest rates and a steeper yield helped keep utility stocks mired in a narrow range. Fears of inflation, other than just at the commodity level, were also a concern for would-be utility investors. Modest employment gains supported the theory that the economy would likely become more robust in the months ahead. The Federal Reserve’s quantitative earning measures intensified these worries by leading to a weaker dollar, higher commodity prices and a batch of better-than-expected earnings announcements.

Nevertheless, a sluggish housing market, trepidation over debt restructuring in Europe, the expectation for layoffs at the state and municipal government level in the U.S., and a reversal in commodity prices now have yield seekers looking for safe and reliable returns once again.

The chart of Dow Jones Utility Index currently depicts a bullish reverse Head & Shoulders pattern that targets a move up to the 525 level, representing a 20% gain from current levels. This formation mirrors a similar set-up that developed between 2002 and 2003 that led to move that far exceeded the objective of its bullish reverse Head & Shoulders back then.

In any event, there are a number of utility stocks whose yields are still in the 4-1/2% -to-5% range. They include: American Electric Power Co., (AEP at 4.60%); Consolidated Edison (ED at 4.41%); Duke Energy (DUK at 5.07%); Exelon (EXC at 5.03%); FirstEnergy (FE at 5.17%); NiSource (NI at 4.52%); and Southern Company (SO at 4.49%).

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