Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets_5

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Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets_5 172 STOCK MARKET GROUPS 10 FIGURE 9.20 LONDON COPPER PRICES VERSUS PHELPS DODGE, THE LARGEST COPPER PRODUCER IN THE UNITED STATES. THE MAJOR DOUBLE TOP IN COPPER IN THE AUTUMN OF 1989 AND ITS SUBSEQUENT COLLAPSE COINCIDED WITH A S HARP DROP IN THE PRICE OF PHELPS DODGE. THE ARROWS SHOW THAT RALLIES IN THE PRICE OF COPPER HAVE BEEN BENEFICIAL TO PHELPS DODGE SHARE PRICES. London Copper The Dow Utilities as a Leading Indicator of Stocks Phelps Dodge Dow Theory is based on the comparison of two Dow Jones averages—the Dow Jones Transportation Average and the Dow Jones Industrial Average. One of the basic tenets of Dow Theory is that these two averages should trend in the same direction. In other words, they should confirm each others trend. Many analysts pay less attention to the third average published in the daily pages of the Wall Street Journal— the Dow Jones Utility Average. Yet, the Dow Utilities have a respectable record of anticipating turns in the Dow Industrials. This leading tendency of utility stocks is based on their relatively close ties to the bond market, which also is a leading indicator of stocks. The Dow Utilities provide another link in the intermarket chain between the bond market and the stock market. Because they are so interest-sensitive, utilities usually reflect interest rate changes (as reflected in the bond market) before those changes are reflected in the broader market of stocks. Since they are impacted by the direction of interest rates and inflation, utilities are also affected by such things as the trend of thestocks, such as savings and loans and money center banks, usually trend in the same dollar and commodity prices. For these reasons, the Dow Utilities are a part of thedirection as the bond market and in the opposite direction of commodity markets. By intermarket picture.monitoring 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 a DOW UTILITIES VERSUS THE DOW INDUSTRIALStendency to lead the stock market at major tops and bottoms. Before looking at a comparison of the Dow Utilities relative to the Dow Industrials Not all commodity groups trend in the same direction. Copper and aluminum in more recent times, lets consider their relationship over a longer time span. Sinceshares weakened in the second half of 1989 as copper and aluminum prices fell (along 1970, five major turns in the Dow Industrials were prece ...