Dow Jones Utility Average Downside Targets

As the Dow Jones Industrial Average and Dow Jones Transportation Average have achieved highs above their respective 2007 peaks, the Dow Jones Utility Average has not fared as well.  In fact, the Utility Average has been in a declining trend since April 2013.

In the short-term, the threat of rising interest rates is heavily impacting the performance of publicly traded utilities.  Because utilities are dependent on borrowing to finance operations, as interest rates go up so does the cost to borrow.  Higher borrowing cost are expected to reduce the prospects for earnings, resulting in an adjustment of stock prices.

Conventional wisdom suggests that if interests increase the price of utility stocks will decline.  However, as depicted in the chart below, the low in 1942 for the Dow Jones Utility Index, after the 1929 collapse, coincided with the secular low in interest rates, which peaked in 1980.

We aren’t sure what triggered the peak in utility stocks in 1965, however, the period from 1942 to 1965 was a strictly rising interest rate environment.  With this in mind, we have included Edson Gould’s Speed Resistance Lines (SRL) for what the downside targets would have been at the time.  The decline from the peak at 163.32 went to the conservative downside target of 86.30 and the extreme downside target of 54.44 with the actual low near 57.93.

Looking at the Utility Average from 1973 to the present, we see that, for now, 552.74 is the current peak in the index.  Applying the same SRL from the low in 1974 to the recent peak, we get a conservative downside target of 358.71 and an extreme downside target of 184.24.

Because the Dow Jones Utility Average has embarked on a declining trend without the ability to exceed the prior top, we are hopeful that the index can decline, at minimum, to the conservative downside target of 358.71. This would mean a decline of –25% from the closing level of 482.94 on August 23, 2013.  If there is any momentum in the declining trend, there is the remote possibility that the Dow Jones Utility Average can decline to the extreme downside target of 184.24 or –61% from the current level of the index.