Dow Utilities And The Tactical Investor Dow Theory -

Dow Utilities and what they are indicating for the markets

Dec 31, 2024

Dow Utilities: A Telltale Signal for Market Movement

The Dow Utilities (IDU) surged to new heights in September, and according to the Tactical Investor’s Dow Theory, the broader market was poised to follow suit—and it did, with the Dow setting new highs in both November and December. The laggard in this scenario has been Dow Transports, but rest assured, it will eventually mirror the same upward movement in due course.

Both Dow Transports and Dow Industrials are trading within highly oversold ranges, leaving ample room for upside potential. On the flip side, the Dow Utilities are now entering overbought territory. The next bearish MACD crossover could trigger a pullback for the IDU, potentially bringing it down to the 133-139 levels, translating into a move in the 9300-9600 range for the Dow Utilities. Should this scenario unfold, consider it not as a cause for alarm but as an opportunity.

If the Dow Utilities experience a pullback, expect the Dow to follow suit. The severity of this pullback will determine whether the Dow’s correction will be mild or dramatic. However, the broader trend remains bullish, so any pullback should be viewed with an opportunistic mindset. The greater the deviation from the norm, the more compelling the buying opportunity becomes.

We expect transportation and several other stocks in the Dow industrials to outperform the markets. When a sector is hated, and the trend is up, it’s probably the perfect time to establish long positions.

Dow Utilities Short-Term Outlook

Critical Levels for Dow Utilities and Transports: A Key Indicator of Future Market Moves

If the Dow Utilities (IDU) closes below the 801-804 range or if IDU consistently closes below 141 each month, it will signal a failed breakout attempt for the Dow Transports. This scenario will likely convince many that the transportation sector is headed for a breakdown, but the opposite is poised to unfold. Such a move would set the stage for a potential turnaround, as the transportation sector is expected to outperform the broader market in the coming 9-12 months.

However, if Dow Transports trades below 10,500 for three consecutive days, the likelihood of a sharp move to the 9300-9600 range for Dow Utilities will increase dramatically. Once again, treat any pullback as an opportunity. The current setup suggests that the transportation sector is positioned for a significant rebound despite temporary setbacks. In a market still, in a bullish trend, such corrections will ultimately be stepping stones to greater gains.

It is astonishing to see bullish readings continue declining while the market is trading close to its all-time highs. The anxiety gauge has pulled back and is now trading very close to the Panic zone. Market Update Nov 30, 2019

The Dow is trading close to 28K again, and if one looks at the sentiment, one would be inclined to think that it was trading closer to the 26.5k range. Neutral sentiment has increased another two points, almost at a three-month high. Bullish readings are well below their historical average of 39. Overall, market sentiment indicates that a strong pullback, if it comes to pass, has to be viewed as an opportunity.

In short, we can conclude that next year’s market action will catch 90% of experts with their pants down. All the experts, even those who got the first part of this bull market right, are wearing their emotions on their sleeves. How do we know? All one has to do is pay attention to their political bias. If you have a bias (politics or finance), your vision is clouded, hence your analysis.

The Dogs of the Dow vs. Small Dogs of the Dow: A Battle of Investment Strategies

The “Dogs of the Dow” strategy has long been a popular approach for income-focused investors, involving the purchase of the ten highest-yielding stocks in the Dow Jones Industrial Average at the start of each year. Meanwhile, the “Small Dogs of the Dow” strategy takes a slightly different angle, focusing on the five lowest-priced stocks from those ten Dogs. Proponents of the Small Dogs of the Dow argue that this variation may be a more effective approach, especially considering historical performance.

For instance, a Forbes study found that the Small Dogs of the Dow outperformed the Dogs of the Dow in nine out of ten years between 2003 and 2013. Over the same period, the Small Dogs also beat the Dow Jones Industrial Average in seven of those years, showcasing their potential for stronger returns. The rationale behind the Small Dogs’ success is simple. These stocks typically offer greater growth potential than the highest-yielding Dogs, which may be more stable but less likely to appreciate dramatically. Furthermore, the Small Dogs of the Dow strategy offers a higher level of diversification, as it involves only five stocks instead of ten.

Additional research from the New York Times found similar trends, with the Small Dogs outperforming the Dogs of the Dow by an average of 3% annually between 1988 and 2009. However, it’s crucial to remember that past performance does not guarantee future results, and all investment strategies carry inherent risks. Therefore, before diving into either the Dogs or Small Dogs of the Dow, investors should carefully evaluate their financial goals, risk tolerance, and time horizon. Consulting with a financial advisor is also recommended to ensure the strategy aligns with individual needs and objectives.

Conclusion: Seizing Market Opportunities with Tactical Precision

The current landscape reveals a significant shift in market dynamics, offering remarkable opportunities for those who understand the indicators and act decisively. The Dow Utilities (IDU) and Dow Transports present powerful signals for the market’s direction. The surge in Dow Utilities in September, followed by the broader market’s rise in November and December, illustrates the ongoing bullish trend. While the Dow Utilities approach overbought territory, any forthcoming pullback should be seen not as a cause for concern but rather as an opportunity to buy into a fundamentally strong market. Should the utilities retreat to the 9300-9600 range, it would offer a compelling entry point—reinforcing the idea that corrections are merely short-term setbacks in a market with a bullish long-term trend.

A critical turning point is if the Dow Transports dip below 10,500 for three consecutive days. This scenario would likely lead to increased volatility, but it would also position the transport sector for a substantial rebound, further reinforcing the broader positive outlook for the Dow. The small dips in the market caused by fluctuations in sector performance should be viewed through a bullish lens, as they often precede major upturns. History supports this notion, with the transport sector expected to outperform the market in the next 9-12 months—just as it did during past periods of underperformance.

Furthermore, an intriguing dynamic emerges when evaluating strategies like the “Dogs of the Dow” versus the “Small Dogs of the Dow.” The latter, focusing on the five lowest-priced stocks among the highest-yielding Dow components, has consistently outperformed the former. Studies show that between 2003 and 2013, the Small Dogs of the Dow outperformed the Dogs of the Dow in nine out of ten years. This outperformance aligns with the general market principle that undervalued stocks (especially those poised for growth) offer more significant upside potential than stable, high-yielding names. As a tactical strategy, the Small Dogs provide an opportunity to harness higher growth potential with added diversification.

The current market presents a ripe environment for those who can discern the underlying bullish trend and take advantage of pullbacks and sector rotations. Just as the Small Dogs of the Dow have proven superior over time, recognizing undervalued opportunities within the broader market—whether in utilities, transports, or specific stock strategies—will be key to capitalizing on future gains. Ignore the naysayers and market noise; focus on what the data tells you, and act accordingly. The path forward is clear: when the market pulls back, it’s time to double down and prepare for the next wave of growth.