Tabell’s Market Letter – January 22, 1971

TABELL'S MARKET LETTER l —'J 909 STATE ROAD. PRINCETON. NEW JERSEY 08540 OIVISION OF MEMBER NEW YORK STOCK EXCHANGE MEMBER AMERICAN STOCK EXCHANGE January 22, 1971 It is wise, in the stock market as elsewhere, to be somewhat SUSPIClOUS about universally-held opinions. This is often difficult to do. Market analysts are not totally unreasoning beings and, for – an6Pin1(;,-n-to-be-aTinostunrversahn-th-e'1irllTpliite–;-it'niu-st-pos-seSs'ahlghd-egree 6f plausibllity-.- — – At the moment, inspection of the market views of a number of observers reveals a forecast which appears, on the surface at least, highly plausible and which is the focus of a good deal of agreement. That forecast runs more or less as follows. The market (most observers have gotten around to agreeing with us on this point) is in a healthy state, and the long-term outlook is good. However, so the conventional wisdom runs, the persistent rise since November has been too great to be sustainable, and the market is in need of a correction of some sort if it is to remain soundly based. Now our conviction, based on experience, is that, whenever an opinion is as common as the one above, the market tends to surprise the proponents of that opinion. In this particular instance, the surprise could take one of two forms. 1) The market could continue to advance without any notice- able correction or, 2) the correction, when it finally arrives, could be bigger than anyone suspects. Concerning the second alternative, we are, of course, wary of such an occurrence, but we confess we are unable to see in our technical work, at the moment, any of the sort of deterioration that would normally accompany significant vulnerability. We are forced, therefore, to a closer examina- tion of the conventional theory that a significant correction from these levels is inevitable and that, were such a correction to occur, the market would, thereby, find itself in a more healthy condition. Like many pieces of conventional wisdom, this theory does not find its elf borne out by the facts. Indeed, an inspection of stock market history seems to indicate that precisely the reverse is true. In other words, the market will indicate a sound technical base by continuing to advance without substantIal corre6t16n and, conversely,- a protractea'Clownswing attJ5 stage would suggest greater – vulnerability to come. To buttress this conclusion, we ask that the reader bear with us through a recitation of some arid statistics. The bull market is now 166 trading days old and has scored, so far, a 35 advance in the Dow. If we define bull markets as upward swings without an intervening correction greater than 15 , we find that there have been eight such since 1942. twe are making an exception here for the 1945-1953 upswing, generally considered by most analysts to be a separate market phase even though the sub- sequent correction was only 13.) These eight upswings have ranged from 284 to 1211 trading days in length. Thus the historical record would suggest that there should be at least another six months of life remaining in the present advance. Now let us examine the interruptions that have occurred in the present upswing. A 4 downswing in the Dow took place in early June, and a 7 decline occurred in late June and early July. This is consistent with the historical record since it is fairly common, following a sharp drop, to have wide swings early in the process of a base formation. Since July, however, there have been only four notable corrections — none of them as great as 4 and none lasting longer than 16 trading days. It is this lack of downside action, evidently, that leads many analysts to feel some sort of purgation is required. However, six of the eight previous bull markets continued longer than the present one without a single 4 correction ever being observed once the base formation stage was passed. The 1957-1960 upswing, for example, once past the base, continued almost a year and a half from the low before a 4 correction took place and it was, by that time, four-fifths completed. In the majority of past cases, an advancehas been at least Iialf-way complete from a-time standpoint before a 4 ,— downswing interrupted it. What about the chances for a 7 correction, one which, in the present case, would bring the Dow back to 790 In most previous bull markets, no such correction has ensued until the latter third of the advance and, in at least two cases, the bull market ran to its ultimate completion without ever scoring a decline of this magnitude. Greater corrections, i.e., 10 or more, have occurred exclusively in the terminal stages of previous bull markets, and six of the eight past bull markets never saw a 10 correction during their entire history. We are thus inclined to find ourselves at variance with the conventional thmking in this regard. We think that the more the market continues to display the sortof strength it has been showing, the greater the likelihood of its internal condition being basically a healthy one. Were the market to undergo a modestly severe decline here, we would conSider it an indication that the advance had reached a more mature stage than we now have reason to suspect it has. Dow-Jones Ind. (1100 a.m.) 858.02 ANTHONYW. 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