Tabell’s Market Letter – September 02, 1948

— —- Technical Market Action The market strength of Wednesday and Thursday carried the rail average past the August high of 62.14. Thursday's high was 63.36. The industrial average,at Thursday's high of 184.88, fractionally pene- trated ,the August high of 184.54. A bit more decisive penetration by the industrials, say to above 184 on an hourly average or at the close, would confirm the uptrend signal given by the rails. From the action of the rail average, it would seem that the advance mentioned in earlier letters has started eve though it is about a week late. I expect the advance will be a broad upward move of two to four months duration with a price objective somewhere around the 1946, high of 213. First resist- ance should be met at the 188-190 level followed bY,a dip back to 185 or so before 188-193' supply area is penetrated. ' In recent weeks there has been a decided 'increase in bearish prognostications regarding a slump in business' and a, depression. These predictions by economists, newspaper columnists and Washington writers, are not new. They started in the Autumn 'of 1945 when President Tru- man's advisory board warned of, a coming drop in the business index that would result in seven or eight million unemployed by early 1946. As a result, the President attempted the obviously impossible procedure of trying to raise wages while holding down prices., No prediction could have been more wrong. The ensuing predictions have been equally falla- cious. The predicted slumps in business in late 1946 and early 1947 and early 1948 have not occurred. Now the recession has been postponed to late 1949. As a result of these dire propheSies, the investing and speculating public has become so fearful of the coming catastrophe that stocks are selling at an absurdly low price to earnings ratio to yield, in innumerable cases, 5 while high grade bond yields are still hovering around the 3 level. I do not pretend to be an economist. I don't know when business will start to falloff sharply. Obviously, our tremendous business boom cannot last forever. However, the inevitable ending is not necessarily a bust. It is possible that there will 'be piecemeal adjustments as each sector of industry, one by one, readjusts and returns to a normal pattern. This has already happened in many industries. Certainly, the, shortages and demands built up by four years of war and by ten years of depression are hot going to be satisfied by the last three years of peak production, large as that production may be. This becomes even more unlikely when we consider the growth in population over the last twenty years, and the greatly increased incomes of a vast segment of our people, thus greatly enlarging the mass buying power. If the stock market had only partially discounted the vast business boom of the last three years, there might be some cause for concern about a drastic slump in the market, but even a temporary falling off in business should not, ,effect, to any great extent, a market that has no top-heavy speculative pOSitions, is not operating on borrowed money, ,and has not risen in price to discount ,the greatly increased earnings;f ,' The stock market sceptics of today are possibly forgetting the psychological state of mind of the nation. This certainly has been true for the past two years when, despite the huge earnings and dividends, a mass fear psychosis has held back the stock market despite price rises in everything else. A l!Iood of pessimism or of 'optimism The opinions .xpressed in this leHer are- the perianal interpretation of ch,uts by t..1r. Edmund W. Tabel! end are not prese,nted as the opinions of Shields & Company. ——————————————————————————– Technical,Market Action -2- however, cannot be sustained over a long period of time. Nothing changes faster than public sentiment, and, after two years of fearful forebodings of dip in business, the mass psychology is about ripe for change despite even a possible temporary 33 1/3 to 50 drop in earnings. Mass thinking cannot be measuredby statistics or fundamentals. It can only be measured by the technical action'of the market itself, by the demand for and supply of securities. The stock market has been slowly building up a strong pattern for a number of years. With the many uncertainties of te present day, it is a hazardous task'to attempt a long range forecast. The predictions of today'may look awfully bad two years from now. However, while this letter may have many faults it is always willing to state a definite opinion. Based purely on the action of some fifteen hundred charts'and graphs of the variOUS market averages and individual stOCks, I submit the following long range prediction. The price ranges are definite but the timing is only approximate and largely guesswork. I believe that the stock market in May 1942 started a long upward war price cycle, similar to that 'of 1914-1929. Such long term price cycles usually have five phases – three of advance and two of decline. The first phase was the advance from 93 in the Dow-Jones industrials in May 1942 to 213 in May 1946. The second, or declining phase, was the drop from 213 to 160 in May, 1947. 'This area was again tested in February of this year. We are now in the third phase -,a period of advance. The recent decline was only a normal intermediate correction in the major upmove. This third, or aqvancing phase, will be comparatively moderate and selective with the better-grade, wellmanaged companies leading the advance. The ultimate objective, interrupted by intermediate corrections, will be around 250 in the Dow-Jones industrials with 5 leeway on either side. This objective should be reached in late 1949. The fourth Or declining phase should culminate in the early 1950s in the 200-180 area. The fifth, or final advancing phase will be an upsurge carrying into the middle 1950s. This will be the dynamic upswing with over-speculation and heavy public participation. The pattern is not complete as regards the ultimate price object- ive for this final advancing phase, but the Dow-Jones industrials should sell above the 1929 high of 386 A preliminary objective, cal- culated from the long term base patterns, suggsts about 450 in the averages. The objectives of 250 for the present phase, and 450 for the ultimate advance, seem fantastic now, but only because of the present depressed mental state. Percentagewise, the advances are quite in line with the moves of the market over the past sixty years. It must be remembered that this country is still in a long term upward growth channel My prediction may eventually turn out to be quite conservative. September 2, 1948 EDMUND W. TABELL SHIELDS & COMPANY Dow-Jones Ind. 184.41 Dow-Jones Rails 62.90 Dow-Jones 65-Stock 69.56 The op;'ios expressed i this leiter are Ihe penon&J lnlerprefatioft 01 charts by Mr. Edmund W. Tabell and ere not presented as tho opinions of Shields & Company.