Dow Jones Utility Index: The Pursuit Of Yield Continues

By Jim Donnelly, Olson Global Markets

As 2011 comes to a close, it is clear that the pursuit of reliable yields persists. As noted in previous alerts, a bullish reverse Head & Shoulders pattern on the Dow Jones Utility Index (DJU), which is eerily similar to one that developed back in 2002 and 2003, continues to play out to the upside. With nominal interest rates at much higher levels during 2002 and 2003, the beginning point of the previous reverse Head & Shoulder pattern was from much lower price levels.

At present, short-term interest rates are expected to stay near zero for at least the next 18 months. Moreover, “operation twist” continues to force yields on longer-term treasuries to ever lower levels. As a result, conservative investors, retirees as well as pension managers are finding dividend yields on a wide array of utility shares appealing. The prospect of capital appreciation adds to their luster.

The “objective” of the current bullish reverse Head & Shoulders pattern remains at the 525 level, which suggest that a 13.4% rise in the DJU index is technically expected to be achieved from Friday’s close.

While the outlook for utility prices remains promising, a general concern that an unexpected riseU.S.interest rates, as well as a rise in other nations’ sovereign debt yields, could derail the present optimism for utility shares. A change in the treatment of dividends from a tax point-of-view could also become a much bigger issue in 2013.

For now, however, the Dow Jones Utility Index appears to be headed for  much higher levels as revenue strapped investors try to find conservative sources of income.

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