Dow Utilities And The Tactical Investor Dow Theory

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Dow Utilities

Dow Utilities and what they are indicating for the markets

The Dow Utilities via (IDU) surged to new highs In Sept and per the Tactical Investor Dow theory, the Dow should follow in its footsteps and it did so. The Dow set new highs both in Nov and December.  The laggard so far is the Dow transports and in due course it to follow the same path.

Both Dow transports, and Dow industrials are trading in the extremely oversold ranges, so technically they have plenty of upside potential. On the other hand, the Dow Utilities are now trading in the extremely overbought ranges, and the next bearish MACD crossover is likely to lead IDU(a proxy for the Dow utilities) to pull back to the 133-139 ranges, which would translate to a move to the 9300-9600 ranges for the Dow Utilities. If it comes to pass, the pullback should be treated as an opportunity.

If the Dow utilities pull back, then the Dow will follow in its footsteps too; therefore, the intensity of the next pullback will determine if the pullback the Dow experiences will range from mild to wild.  The trend is still positive, so we will only be looking at the pullback from an opportunistic perspective; in other words the stronger the deviation from the norm the better the opportunity.

 

Overall we expect the transportation and several 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 in that sector.

Dow Utilities Short Term Outlook

IDU iShares U.S. Utilities ETF daily Stock Chart

If the utilities close below the 801 to 804 ranges or IDU closes below 141 on a monthly basis,  then the first breakout attempt by the Dow transports is likely to fail. This will convince everyone that the transportation sector is going to breakdown, but precisely the opposite will transpire. If the Dow transports trade below 10500 for three days in a row, the odds of a move to the 9300 to 9600 will spike significantly.  Again any pullback should be viewed through a bullish lens. Overall we are also expecting the transportation sector to outperform the market over the next 9-12 months.

It is quite astonishing to see bullish readings continue to decline while the market is trading close it’s 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 ranges. Neutral sentiment has inched up another two points and its almost at a 3 month high. Bullish readings are well below their historical average of 39. Overall market sentiment is indicating that a strong pull back 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 (be it politics or finance), your vision is clouded and hence your analysis.

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