Tabell’s Market Letter – December 02, 1966
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Walston &Co. –,;……;,..; Inc. ;…-…;….;.. MUNICIPAL BONOS UNDERWRITERS MUTUAL FUNDS Members New York Stock Exchange and Other Principal Stock and Commodity Exchanges TABELL'S MARKET LETTER OFFICES COAST TO COAST AND OVERSEAS December 2, 1966 Last week's market was a desultory affair. The Dow-Jones Industrial Average moved lower on each of the five days of the week. Although decline s were small, the biggest drop in price being a 5.90 point decline on Tuesday, the closing low of 789.47 reached on Friday was moderately below the previous week's low close of 794.98 and brought the Dow for the seco time, to around the 790 level previously mentioned by this letter as an important downside target. Of interest is the fact thaton this second approach to the 790 support level, most of our shorter term market indicators had reached, or were close to, oversold territory. As wehavenoted,before,the,.bJstoJ'Jcal.pattern,favors in the of December, but any such irregularity should probably be viewed as an opportunity to esta- blish positions prior to the start of the DecemQer-January rally. One of the most interesting features of the recent market has been the behavior of short interest on the New York Stock Exchange, a figure which is released by the Exchange shortly after the 15th of every month. As of November 15th, the total number of shares in short position increased to a record level of 14.1 million, which was an advance from 12.6 million shares in the previous month. The 14. 1-million-share figure represented the peak of a rather steady rise in short interest which had been going on for the past six months, ever since May of this year. It is, at least theoretically, true that a high short interest tends to be a supportive factor for the market in that shares sold short must, eventually, be repurchased. Certainly, this reasoning cannot be faulted. It has, however, to minimize the significance of the current high short interest level. J i'c 1 EOr this usually takes two forms. On the one hand, it is argued that a t ort interest repre- sents short sales against the box, or short sales rna pa 0 arbitrage situation. This reasoning seems spurious. In a year such wh ost investors have losses, short sales against the box in an effort to po 0 ro . ould be relatively low. There is, moreover, no reason tosuspect ltta'ge'shorts-should be any different presently than it has been in terest is based on the fact that 1 reason for discounting high short inthroughout the year and so far has proved of little help to the st cK In general, 0 n . more later. c erned with the short interest do not look at the raw short interest figure ,u her at something called the short interest ratio, a number arrived at by dividing t interest by the average daily volume for the previous month. A study of this ratio back to the time it was first computed in the early 1930's, is in- teresting. Throughout most of the 1930's and early 1940's, it fluctuated in a range between . 4 and 1. 5 – – in other words, a short interest of between 1/2 and 1 1/2 times daily volume. During the 1950's it tended to be generally higher, remaining for the most part between just under one and two times trading volume. For the month ended November 15,1966, average daily trading volume was 6.77 million shares. Thus the short interest ratio was 2.09 or more thantwo day's volume of trading. Since 1933, a short interest ratio of over 2 has occurred only four times, early 1933, Spring, 1938, Summer and Fall, 1949, and Spring, 1958. The reader will immediately recog- nize these previous periods as major market turning pOints. Of even more interest, however, is the behavior of the short interest ratio in relation to the trend of the market. The low in wasthe short interest ratio this year was in May when a ratio of 1. 10 reached. At that time the Dow was hovering just underneath the 900 level. Since then, while the market has been moving sharply downward, the short interest ratio has been increasing. In other words, the short sellers have been selling – – not on a rally, as is the usual case – – but into the teeth of one of the sharpest market declines in years. This also, is a rare phenomenon. A sus- tained rise in short interest in the face of a falling market has again occurred on only a few occasions since the early 1930's. These occasions are Fall,1932, Spring, 1938, Spring, 194 , Spring, 1949 and Summer, 1953. Each of these points also constituted a major stock market low. It is, of course, possible that economic events in 1967 will bear out the negative ex- pectations of those who have sold short. However, the historical implication of the recent be- havior of the short interest ratio cannot, it would seem, be ignored. Dow-Jones Ind. 789.47 ANTHONY W. TABELL Doll!..l.ones Rqils 201 50 WALSTON & CO. INC. A ,,'irhII;)WLr.lA.Jetter t8 published for your convenience obtained from sources we believe to Bnd mformatlon Rnd Is not an offer be rehable. but we do not gUarantee to sell or a Ita occuraey BOilllitaUon to buy Walston & Co Bny Inc see\ and lil!'t.Ie&md Bed Tb i d' e n- ftIIPto;ven mQ have an intereBt in or pUl'chase and &ell tbe referred to herein. …. 0 cers, rectors or WN.801