Things keep changing as times change. Conventional intermarket tells us a few characteristics about utility sectors. First it belongs to the late economic sector. Second bond prices and utility stocks usually trend in the same direction. They peaked together in late 1993 and bottomed together in late. In a climate of falling bond prices, utilities are often among the stocks that suffer the greatest damage.

Third, because of the perceived utility and bond link, even utilities are assumed to have a connection with commodities like copper. At the start of 1995, the peak in copper prices coincided with an important bottom in bond prices. The CRB/bond ratio turned up in late 1993 and continued to rise for almost a year. This was during a period of time when copper stocks rose and utilities tumbled.

Visiting markets from 1995 onwards would illustrate how bonds global index has risen relentlessly while the DOW Utility index has see sawed along the index (Fig.1). Though intermarket cases can be partially applied, it seems like a forced explanation of the conventional utility vs. bond behavior. And if this was not enough, let’s look at copper and DOW Utility Index. From 1995 copper and utility look like sector high correlated peers (Fig.2). This again is a classic intermarket failure.

Intermarket relationships are no rules and we have seen conventional intermarket relationships changing and failing with time. One would try to explain why intermarket failures happen, but that is again hindsight bias. For example when markets lose their free nature, intermarket relationships are bound to be effected. The US government is trying to control the short end of the yield curve, the reason for the relentless bond trend and disruption of the intermarket relationship. Intermarket relationships like everything are bound to change. Because there are few rules in markets, we need to focus on time and understand changing dynamics through cycles. Below we have illustrated cycles of some international utilities (E.ON, Tata Power).

Mukul Pal, CMT, Orpheus Capitals, Global Alternative Research