broader market might bein some trouble.SAVINGS AND LOANS VERSUS THE DOW
Figure 9.14 compares the S&P Savings and Loan Group Index to the Dow Jones Industrial Average from 1985 through the beginning of 1990. The tendency of the S&Lgroup to lead the broad market at tops can be seen both in the second half of 1987and the last quarter of 1989. The S&L Index formed a major "head and shoulders"topping pattern throughout 1986 and 1987. As stocks were rallying to new highs inthe summer of 1987, the S&Ls were forming a "right shoulder" as part of a toppingpattern. That bearish divergence was a warning that the stock market rally might bein danger. To the far right of Figure 9.14, the sharp breakdown in the S&Ls in thelast quarter of 1989 again warned of impending weakness in the broad market. Figure9.15 gives a closer view of the 1989 peak. Even though the Dow Industrials rallied fora challenge of the October peak in December 1989, S&Ls and other interest-sensitivestocks continued to drop sharply, sending a bearish warning that the stock marketrally was suspect.which one will lead, or which one will provide the vital clue. The only way to knowis to follow both.Figure 9.13 compares international oil shares to the broad market during 1989.The upper chart plots the S&P oil share index versus the S&P 500 stock index. Thebottom chart is a ratio of oil shares divided by stocks. As the bottom chart shows, oilstocks outperformed the broad market by a wide margin during the fourth quarter of1989 and the first month of 1990. Clearly, the place to be as the old year ended was inoil stocks (along with precious metals). One place not to be was in interest-sensitivestocks.INTEREST-SENSITIVE STOCKS
On January 31, 1990, Investor's Daily ranked its 197 industry groups for the priorsix months. The six best-performing groups were all commodity related: Gold Mining (1), Food—Sugar Refining (2), Silver Mining (3), Oil & Gas—Field Services (4),Oil & Gas—Offshore Drilling (5), Oil & Gas—International Integrated (6). Four otheroil groups ranked in the top 20 on the basis of relative strength. In sharp contrast, bank
SAVINGS AND LOANS. VERSUS BONDS
Figure 9.16 compares the S&L group index to Treasury bonds. The arrows pinpointthe turning points in the S&L group relative to bond prices. Notice that bond pricemovements have an important influence on S&L share prices. During 1986 and 1987,the S&L group was caught in between the upward pull of rising stock prices andthe downward pull of a falling bond market. By the time the S&Ls were formingtheir "right shoulder" peak in the summer of 1987, bonds had already begun theircollapse. It seems clear that the more bearish bond market (and the accompanyingrise in interest rates) hit the interest-sensitive sector before it hit the general market.The bond market therefore became a leading indicator for the interest-sensitive stockswhich, in turn, became a leading indicator for the stock market as a whole.Figure 9.16 shows the bond market rally stalling in the fourth quarter of 1989 andfinally turning lower in an apparent "double top." The loss of upward momentumin bonds and the subsequent rise in interest rates contributed to the sharp selloff infinancial stocks. In this case, however, the actual price slide appears to have begunin the interest-sensitive stocks with bonds following.
SAVINGS AND LOANS VERSUS BONDS
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FIGURE 9.15THE S&L STOCKS PEAKED IN OCTOBER 1989 ALONG WITH THE DOW. HOWEVER, THE DECEMBER RALLY IN THE DOW WASN'T CONFIRMED BY THE S&L STOCKS. THIS NEGATIVE DlVERGENCE WAS A BEARISH WARNING FOR THE BROAD MARKET.The Dow versus the S&Ls
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STOCK MARKET GROUPS
FIGURE 9.16THE S&L STOCKS SHOW A STRONG CORRELATION WITH TREASURY BONDS. THE DOWNWARD PULL OF BONDS IN 1987 CONTRIBUTED TO THE TOPPING ACTION IN THE S&L INDEX. IN THE FALL OF 1989, THE RALLY FAILURE IN BONDS HAD A LOT TO DO WITH THESUBSEQUENT COLLAPSE IN THE S&Ls.
MONEY CENTER BANKS VERSUS THE NYSE COMPOSITE INDEX
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FIGURE 9.17THE S&L INDEX SHOWS A STRONG NEGATIVE CORRELATION WITH THE CRB INDEX FROM1985 TO 1990. THE 1987 TOP IN THE S&Ls MIRRORED A SIMILAR BOTTOM IN THE CRB INDEX.THE MID-1988 PEAK IN THE CRB HELPED LAUNCH THE S&L RALLY. THE PEAK IN THE S&Ls INTHE AUTUMN OF 1989 COINCIDED WITH THE BREAKING OF A DOWN TRENIHINE BY THECRB INDEX.
S&Ls versus BondsS&Ls versus CRB Index
BondsCRB Index
SAVINGS AND LOANS VERSUS THE CRB INDEX
If the bond market trends in the same direction as interest-sensitive stocks, the CRBIndex should move inversely to both. Figure 9.17 compares the S&Ls to the CRB Index.A rising CRB should be bearish for S&Ls; a falling CRB Index should be bullish. Andthis is what Figure 9.17 shows. Figure 9.17 reveals the CRB Index tracing out a "headand shoulders" bottom in 1986 and 1987, whereas the S&Ls are tracing out a "headand shoulders" top. However, the patterns are not synchronous. The "left shoulder" inthe S&Ls in 1986 coincides with the middle trough (the head) in the CRB Index. Thethird trough (the "right shoulder") in the CRB Index in the spring of 1987 coincideswith the middle peak (the head) in the S&Ls. The "right shoulder" in the S&Ls inAugust of 1987 occurs well after the CRB Index has completed its basing pattern andis linked to the stock market peak that month. Still, it appears that a lot of the actionin the S&Ls can be attributed to weakness in bonds and strength in the CRB Index.The S&Ls remained under pressure from the summer of 1987 to the summerof 1988. During that same time, the CRB Index continued to rally. In the summerof 1988, the CRB Index peaked out and began a yearlong descent. During that same
year, the S&Ls rallied sharply. In the fall of 1989, it can be seen that the peak inthe S&L stocks occurred at about the same time that the CRB Index was breakingits yearlong down trendline. Since the S&Ls are so closely tied to the bond market,and the bond market moves inversely to the CRB Index, it shouldn't be surprising todiscover a strong inverse relationship between the S&Ls and the CRB Index.MONEY CENTER BANKS VERSUS THE NYSE COMPOSITE INDEX
Another group that suffered from rising interest rates as the 1980s came to a closewas the Money Center banks. Figure 9.18 compares the S&P Money Center GroupIndex with the New York Stock Exchange Composite Index through 1989 and thebeginning of 1990. Up until October 1989, Money Center banks had easily kept pacewith the stock market. Both peaked together in October of that year. However, as theNYSE Index rallied into early January, the Money Center bank shares continued toplummet. Part of the reason for that sharp selloff is the same as for the S&Ls andother interest-sensitive stocks—falling bond prices (rising interest rates) and firming
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STOCK MARKET GROUPS
FIGURE 9.18MONEY CENTER BANKS VERSUS THE NYSE COMPOSITE INDEX. INTEREST-SENSITIVE MONEYCENTER BANKS ALSO DROPPED SHARPLY FROM OCTOBER 1989 INTO JANUARY OF 1990.FINANCIAL STOCKS FELL UNDER THE WEIGHT OF RISING INTEREST RATES AND FALLINGBOND PRICES. THIS WEAKNESS HELPED PULL THE MARKET LOWER.
SUMMARY
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FIGURE 9.19THE UPPER CHART COMPARES GOLD STOCKS TO MONEY CENTER STOCKS AS 1989 ENDED.SOME MONEY FLEEING FINANCIAL STOCKS WENT TO GOLD SHARES. THE BOTTOM CHARTIS A RATIO OF THE CRB INDEX DIVIDED BY TREASURY BONDS. THE BASING PATTERN IN THERATIO SINCE AUGUST OF 1989 AND THE SUBSEQUENT UPSIDE BREAKOUT CONFIRMED THESHIFT TOWARD STRONGER COMMODITIES AND WEAKER BONDS. THIS BENEFITTED INFLATION STOCKS, SUCH AS GOLD AND OIL, AND HURT INTEREST-SENSITIVE STOCKS.Inflation Versus Disinflation Stocks
GOLD STOCKS VERSUS MONEY CENTER STOCKS
As long as the CRB/bond ratio was falling earlier in the year, odds favored the interestsensitive stocks. The CRB/bond ratio bottomed in August of 1989 and continued tostabilize through the fourth quarter. In December, the ratio broke out to the upside andconfirmed that a trend change had, in fact, taken place. The pendulum, which hadfavored bond prices for a year, now showed commodity prices in the ascendancy. Thatcrucial shift explains the dramatic move away from interest-sensitive stocks towardcommodity stocks. And, in doing so, this shift also warned of the uptick in interestrates which began to push stock prices lower.
Figure 9.19 shows a couple of other ways to monitor the relationship between inflationand disinflation stocks. The upper chart compares the S&P Gold Group Index to theS&P Money Center Group Index. Up to the fall of 1989, the Money Center banks wereoutperforming gold stocks by a wide margin. From October of 1989 on, however,that relationship changed abruptly and dramatically. As the Money Center bankscollapsed, gold stocks began to rally sharply. Part of the explanation for this dramaticshift between commodity and interest-sensitive stocks is seen in the bottom chartwhich plots the ratio between the CRB Index and bonds.
SUMMARYThis chapter showed the relevance of intermarket comparisons between various futures markets and related stock groups. It discussed how many stock groups are tied tospecific commodity markets (such as oil, gold, silver, copper, aluminum, and sugar).Since those commodities and their related stopk groups usually trend in the same direction, their relative performance should be studied and compared. Interest-sensitive
commodity prices (especially oil). The weakness in the Money Center stocks alsoprovided another warning to the stock market technician that the attempt by thebroad stock market averages to recover to new highs was not likely to succeed, atleast not until the interest-sensitive stocks started to stabilize.
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STOCK MARKET GROUPS
10
FIGURE 9.20LONDON COPPER PRICES VERSUS PHELPS DODGE, THE LARGEST COPPER PRODUCER IN THEUNITED STATES. THE MAJOR "DOUBLE TOP" IN COPPER IN THE AUTUMN OF 1989 AND ITSSUBSEQUENT COLLAPSE COINCIDED WITH A SHARP DROP IN THE PRICE OF PHELPS DODGE.THE ARROWS SHOW THAT RALLIES IN THE PRICE OF COPPER HAVE BEEN BENEFICIAL TOPHELPS DODGE SHARE PRICES.London Copper
The Dow Utilities as aLeading Indicator of Stocks
Phelps Dodge
stocks, such as savings and loans and money center banks, usually trend in the samedirection as the bond market and in the opposite direction of commodity markets. Bymonitoring the CRB Index/bond ratio, the intermarket trader is able to tell whethermoney should be placed in inflation (commodity) or disinflation (interest-sensitive)stocks. Because of their close relationship to bonds, interest-sensitive stocks have atendency to lead the stock market at major tops and bottoms.Not all commodity groups trend in the same direction. Copper and aluminumshares weakened in the second half of 1989 as copper and aluminum prices fell (alongwith most industrial prices) (see Figure 9.20). Copper weakness in late 1989 was alsotied to stock market weakness as fear of recession intensified. Chapter 13 will discussthe role of copper as an economic forecaster and its relation to the stock market. Thatchapter will also discuss in more depth the relative performance of commodity andinterest-sensitive stocks at major cyclical turning points.Another interest-sensitive group mentioned briefly in this chapter is the utilities.In Chapter 10, we'll examine how intermarket analysis affects the Dow Jones UtilityAverage and the usefulness of the Dow Utilities as a leading indicator of the DowJones Industrial Average.
Dow Theory is based on the comparison of two Dow Jones averages—the Dow JonesTransportation Average and the Dow Jones Industrial Average. One of the basic tenetsof Dow Theory is that these two averages should trend in the same direction. In otherwords, they should confirm each other's trend. Many analysts pay less attention tothe third average published in the daily pages of the Wall Street Journal—the DowJones Utility Average. Yet, the Dow Utilities have a respectable record of anticipatingturns in the Dow Industrials.This leading tendency of utility stocks is based on their relatively close tiesto the bond market, which also is a leading indicator of stocks. The Dow Utilitiesprovide another link in the intermarket chain between the bond market and thestock market. Because they are so interest-sensitive, utilities usually reflect interestrate changes (as reflected in the bond market) before those changes are reflected inthe broader market of stocks. Since they are impacted by the direction of interestrates and inflation, utilities are also affected by such things as the trend of thedollar and commodity prices. For these reasons, the Dow Utilities are a part of theintermarket picture.DOW UTILITIES VERSUS THE DOW INDUSTRIALSBefore looking at a comparison of the Dow Utilities relative to the Dow Industrialsin more recent times, let's consider their relationship over a longer time span. Since1970, five major turns in the Dow Industrials were preceded by a turn in the DowUtilities.1. The November 1972 peak in the utilities preceded a similar peak in the DowIndustrials two months later in January of 1973. Both averages dropped into thesecond half of 1974.2. In September 1974, a bottom in the utilities preceded a bottom in the industrialsthree months later in December. Both averages rallied for two years.173
174
THE DOW UTILITIES AS A LEADING INDICATOR OF STOCKSDOW UTILITIES VERSUS THE DOW INDUSTRIALS
The utilities hit another peak in January of 1981, preceding a top in theindustrials three months later in April. Both averages declined together into 1982.4. The utilities bottomed in July of 1982, preceding a major bottom in the industrialsone month later in August. Both averages rallied together until 1987.5. In January of 1987, the utilities hit a major top, leading the peak in the industrialsseven months later in August 1987.
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FIGURE 10.1A COMPARISON OF THE DOW JONES UTILITY AVERAGE AND THE DOW JONES INDUSTRIALAVERAGE FROM 1983 THROUGH 1989. GENERALLY, BOTH AVERAGES TREND IN THE SAMEDIRECTION. TREND CHANGES ARE USUALLY SIGNALED WHEN THEY DIVERGE. IN 1987, THEDOW UTILITIES PEAKED SEVEN MONTHS BEFORE THE DOW INDUSTRIALS.Dow Jones Utility Average
During these two decades, the Dow Utilities failed to lead a major turn in the DowIndustrials only three times. In March of 1980, both averages bottomed together In1970 the industrials bottomed one month before the utilities. In 1977 the industrialspeaked about six months before the utilities. Of the eight major turns since 1970the utilities led the industrials five times, turned at the same time once and laggedonly twice. The leading tendency of the Dow Utilities at market tops is especiallyimpressive.*Research provided by John G. McGinley, Jr. (Technical Trends, P.O Box 792Wilton, CT 06897) shows that the Dow Utilities have led the Dow Industrials at everypeak since 1960 with only one exception-the 1977 peak. During those 30 years theDow Utilities peaked ahead of the Dow Industrials by an average of three monthsalthough the actual lead time varied from ten months to one month Part of theexplanation as to why the utility stocks lead the industrial stocks can be found inthe relatively close correlation between the utility stocks and the bond market whichwill be discussed later. Consider now the more recent record of how the utilities haveperformed relative to the broad market.Figures 10.1 and 10.2 compare the relative performance of the Dow Jones UtilityAverage (upper chart) and the Dow Jones Industrial Average (lower chart) since 1983As the various charts are examined, a long view will be given. Then a closer viewof the more recent action will be given and some other intermarket comparisons willbe incorporated to include bonds and commodities. Figure 10.1 shows both averagesgenerally rising and falling together. As long as the two averages are moving in thesame direction, they are merely confirming each other's trends. It's when one of thembegins to diverge from the other that we begin to take notice. Figure 10 2 provides acloser view of the 1987 top.The Dow Utilities hit its peak in January of 1987 and started to weaken. (It will bedemonstrated later that part of the reason for this weakness in the utilities was tied tosimilar weakness in the bond market.) The selloff in the Dow Utilities set up a majornegative divergence with the Dow Industrials which continued to rally for anotherseven months. As the industrials were hitting their peak in August, the utilities werejust forming a "right shoulder" in a "head and shoulders" topping pattern (in theprevious chapter, we discussed a similar topping pattern in the interest-sensitivesavings and loan stocks). Although the lead time in 1987 was a relatively long sevenmonths, the peak in the Dow Utilities provided plenty of warning that the rally instocks was approaching a dangerous stage and warned stock market technicians to beespecially alert to any technical signs of a breakdown in the stock averages.Both averages rallied together into the second half of 1989. As 1989 ended however, another divergence developed, except this time, the Dow Utilities rallied tonew highs while the Dow Industrials failed to do so. (Both averages were in theprocess of re-challenging their all-time highs that were set in 1987). Given their normal historical relationship, the rally to new highs in the utilities could be viewedas a positive development. Many technicians took the view that the outlook for the
Dow Jones Industrial Average
industrials would remain healthy as long as the utilities remained strong. Figure 10.3gives a closer view of market events at the end of 1989.Figure 10.3 compares the Dow Utilities to the Dow Industrials during thefourth quarter of 1989 and the first two months of 1990. Both averages sold offin mid-October and then rallied together into the beginning of January. Althoughthe two charts are closely related, the utilities did manage to rally to new highswhile the industrials were unable to clear their October peak. On a short-term basis,however, the last rally attempt by the industrials was not confirmed by the utilities.The utilities completed a "double top" and broke down during the first week of 1990.The industrials broke down a week later.Toward the end of January, the utilities also started to stabilize a few days beforethe industrials. In both instances, the utilities led the industrials by a few days to aweek. The ability of the utilities to stabilize above their October lows was significant.A violation of those lows by the Dow Utilities would have been viewed by techniciansas a particularly bearish development for the stock market as a whole.
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THE DOW UTILITIES AS A LEADING INDICATOR OF STOCKS
FIGURE 10.2IN AUGUST 1987, AS THE DOW INDUSTRIALS WERE HITTING THEIR MAJOR PEAK, THEUTILITIES (WHICH PEAKED IN JANUARY) WERE FORMING A "RIGHT SHOULDER" IN ATOPPING PATTERN, THEREBY CREATING A BEARISH DIVERGENCE. BOTH RALLIED TOGETHERINTO THE SECOND HALF OF 1989. AS 1989 ENDED, THE UTILITY RALLY WASN'T CONFIRMEDBY THE INDUSTRIALS.
DOW UTILITIES VERSUS THE DOW INDUSTRIALS
FIGURE 10.3IN THE FIRST WEEK OF 1990, THE DOW UTILITIES COMPLETED A "DOUBLE TOP" FORMATIONAND BROKE AN UP TRENDLINE, PRECEDING A SIMILAR BREAKDOWN BY THE DOWINDUSTRIALS A WEEK LATER. AS JANUARY 1990 ENDED, THE UTILITIES STABILIZED A FEWDAYS EARLIER THAN THE INDUSTRIALS.Dow Jones Utilities
Dow Utilities
Dow Jones IndustrialsDow industrials
177
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THE DOW UTILITIES AS A LEADING INDICATOR OF STOCKS
BONDS LEAD UTILITIES AT TOP
As revealed in Figure 10.3, the Dow Utilities peaked in the new year about a weekahead of the Dow Industrials. Expanding the focus, it is evident what intermarketforces pulled the Dow Utilities lower. Figure 10.4 compares the Dow Utilities toTreasury bond futures during the same time span. First of all, notice that the rally inthe utilities during the fourth quarter of 1989 was not confirmed by the bond market.As the utilities rallied to new highs, the bond market stayed in a trading range. Duringthe final week of 1989, bonds broke down and hit a two-month low. This breakdownin bonds preceded the breakdown in the utilities by a week. Toward the right side ofthe chart, the utilities are stabilizing while the bonds are probing for a bottom. Therally in the interest-sensitive utilities appears to be hinting that bonds are also duefor a rally.Widen the intermarket circle now to include commodities. Figure 10.5 showsthat the breakdown in bonds during the final week in 1989 (which contributed to the
BONDS LEAD UTILITIES AT TOP
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FIGURE 10.5THE BREAKDOWN IN BOND FUTURES THE LAST WEEK OF 1989 COINCIDED WITH A BULLISHBREAKOUT IN THE COMMODITY RESEARCH BUREAU FUTURES PRICE INDEX (LOWER CHART).THE RALLY IN THE CRB INDEX FROM LATE SUMMER OF 1989 PREVENTED THE BOND MARKETFROM RESUMING ITS UPTREND.March Treasury Bond Futures
Commodity Research Bureau Index
FIGURE 10.4DURING THE LAST WEEK IN DECEMBER OF 1989, BOND FUTURES SET A TWO-MONTH LOW,PRECEDING THE BREAKDOWN IN THE UTILITIES A WEEK LATER. BONDS USUALLY LEAD THEDOW UTILITIES. AS JANUARY 1990 ENDED, THE RALLY IN THE UTILITIES PROVIDED SOMESTABILITY TO THE BOND MARKET.Dow Jones Utilities
March Treasury Bond Futures
selloff in the utilities a week later) coincided with an upside breakout in the CRBIndex. As the bottom chart shows, the rise in commodity prices (which usually trendin the opposite direction of bonds) was a primary reason that bonds were unableto set new highs during the fourth quarter. The bullish breakout in the CRB Indexduring the last week of the year finally pushed bond prices into a slide.Figure 10.6 shows the main culprit that caused the commodity rally and the bondand utilities to tumble. Crude oil prices (sparked by a virtual explosion in heatingoil) rallied sharply during December 1989. Probably more than any other factor, theensuing rally in oil prices sent inflation jitters through the financial markets (andaround the world) and contributed to the selloff in bonds. This oil rally hit bonds inanother way. Japan imports all of its oil. The jump in oil during December (combinedwith a weak yen) pushed Japan's inflation rate sharply higher and caused a collapsein Japanese bond prices. As discussed in Chapter 8, downward pressure on globalbond markets also pulled U.S. bonds lower. To the far right of both charts in Figure10.6, the oil market has started to weaken, which is relieving downward pressure onbonds (and the Dow Utilities and, in turn, the Dow Industrials).
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THE DOW UTILITIES AS A LEADING INDICATOR OF STOCKS
FIGURE 10.6THE BULLISH BREAKOUT IN CRUDE OIL FUTURES IN MID-DECEMBER 1989 WAS A MAJORFACTOR IN THE BREAKDOWN IN BONDS. THE OIL RALLY CAUSED GLOBAL BOND MARKETS(ESPECIALLY IN JAPAN) TO TUMBLE, WHICH ALSO HELPED PULL U.S. BOND PRICES LOWER.
THE CRB INDEX VERSUS BONDS AND UTILITIES
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FIGURE 10.7THERE IS A STRONG VISUAL CORRELATION BETWEEN THE DOW JONES UTILITY AVERAGE(SOLID LINE) AND THE DOW JONES 20 BOND AVERAGE (DOTTED LINE). BOTH TURNEDDOWN TOGETHER IN THE FIRST HALF OF 1987 AND THEN RALLIED TOGETHER INTO THESECOND HALF OF 1989. AS 1989 ENDED, BOTH WEAKENED.
March Treasury Bond Futures
Bonds versus Utilities
A LONGER VIEW OF UTILITIES AND BONDS
The previous discussion showed the ripple effect that usually occurs among thefinancial sectors. As 1989 ended, commodities (oil in particular) started to rally;bonds started to drop; a week later the interest-sensitive utilities followed bondslower; a week later the broader stock market followed bonds and the utilities lower.The key to understanding the relationship between the Dow Utilities and the DowIndustrials lies in the recognition of the close relationship between the utilities andbonds. As a general rule, the bond market (which is especially inflation-sensitive)turns first. Utilities, being especially interest-sensitive, turn in the same direction asbonds before the general market does. The general market, as reflected in the DowJones Industrial Average, usually is the last to turn.Figures 10.7 and 10.8 compare the Dow Jones 20 Bond Average to the Dow JonesUtility Average. It can be seen that bonds and utilities are closely correlated. Bothpeaked during the first half of 1987 several months before stocks, which didn't topuntil August. (Although the Dow Jones 20 Bond Average set new highs in early1987, Treasury bonds failed to do so, thereby forming a negative divergence with
the utilities.) Both rallied together to the fourth quarter of 1989. At the 1989 top,bonds formed a "double top" and failed to confirm the rally to new highs by theutilities (see Figure 10.8).THE CRB INDEX VERSUS BONDS AND UTILITIES
If the Dow Utilities trend in the same direction as bonds, they should trend in theopposite direction of commodity prices. Figure 10.9 compares Treasury bonds andutilities (upper chart) to the CRB Index (lower chart). The upper chart shows thenegative divergence between Treasury bonds and the Dow Utilities in early 1987 andagain in late 1989. The bearish action in bonds pulled the utilities lower. However,the bearish action in both bonds and utilities is closely correlated with rallies in theCRB Index. The final top in the Dow Utilities and the final peak in the bonds in early1987 coincided with a trough in the CRB Index. The breakdown in the two financialmarkets in the spring of 1987 coincided with an upside breakout in the CRB Index.
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THE DOW UTILITIES AS A LEADING INDICATOR OF STOCKS
FIGURE 10.8A CLOSER LOOK AT THE DOW UTILITIES (SOLID LINE) VERSUS THE DOW JONES 20 BONDAVERAGE (DOTTED LINE) IN 1989. THE BOND MARKET FAILED TO ESTABLISH A NEW HIGHDURING THE FOURTH QUARTER, FORMED A "DOUBLE TOP" FORMATION, AND CREATED ABEARISH DIVERGENCE WITH THE DOW UTILITY AVERAGE.Utilities versus Bonds
THE CRB INDEX VERSUS BONDS AND UTILITIES
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FIGURE 10.9WEAKNESS IN TREASURY BONDS AND UTILITIES IN EARLY 1987 AND LATE 1989 (UPPERCHART) IS LINKED TO STRENGTH IN THE CRB INDEX (BOTTOM CHART). THE RALLY INTREASURY BONDS AND UTILITIES FROM MID-1988 IS LINKED TO THE PEAK IN THE CRBINDEX. B