By Jim Donnelly, Olson Global Markets
The combination of weak forward power prices and the expectation for the Fed to taper back on the size of their security prices next year has weighed on equity prices in the utility sector. When looking at the Dow Jones Utility Index (IDU), it is clear that it has been in a wide upward sloping trend pattern since March 2009.
That being said, the technical set-up of the DJU on longer-term charts is not particularly bullish. On the contrary, monthly stochastic and MACD studies continue to decline bearishly with RSI moving sideways within the neutral zone. The problem for the Dow Jones Utility Index is that given its technically weak condition, a break below key trend line support currently at the 477 level could lead to a solid move to the downside and end its 4-3/4 year bullish trend.
Restrained capital expenditures along with lackluster job gains suggest that the demand for power may remain muted for a while longer. The potential for Congress to keep the outlook for businesses muddied is also an issue, particularly with another round of debt ceiling maneuvering on the horizon.
On the other side of ledger, muted power costs could ironically translate into big pluses for both business and individual consumers alike. For businesses, lower energy and utility prices would likely give domestic companies a competitive edge relative to their European and Asian rivals. To individuals, low power costs could be supportive to consumption which in turn could help expand economic activity on the margin.
Over the short-to-intermediate term, utility shareholders could suffer for a bit longer however, with that sector of the market under-performing equity prices in general which will likely remain in a cyclically bullish trend.