Tabell’s Market Letter – January 21, 1972

i I, TABELL-S I MARKET LETTER 909 STATE ROAD. PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW VORK STOCI( EXCHANGE, INC MEMBER AMERICAN STOCK EXCHANGE January 21, 1972 Analysis of the stock market cycle is similar, in many ways, to doing a jigsaw puzzle. Fitting of one piecallows (oLtl!e 3Icldition of further pieces, and this goes on until, finally, a coherent picture begins to take sha-pe.- Likewise;-iththe;3tock iii1irket,'-'as infiiorcanacr-nferme'cHate-cyclesunfold;'''— , – we are able to put together an interpretation of the major cycle that fits the available facts. Let us briefly recapitulate the market history of the past nine months. The Dow reached its high last April 28 at 950.82 and spent most of the Summer and Fall of 1971 declining, reaching a closing low of 797.97 on November 23, thus dropping 16.08 over a period of 156 trading days. In the 38 trading days to January 18, 1972 which followed, some 78 of the loss was recovered with the index advancing to 917.22. The advance in the broad-based indices was even more dynamic with 95 of the loss having been recovered in the S&P 500 and a similar amount in the New York Stock Exchange Index. The problem is what sensibly to make of all this. Those bearishly inclined will point to the fact that new highs have not yet been scored and will, therefore, suggest that the advance from the Nqvember lows is nothing more than an interruption in an on-going bear market. The naturally opti- mistic will point to the vigor of the December rise and assure us that bright new days are in prospect. As we look at the market's action in terms of historical precedent, however, a coherent picture begins to emerge. Let us first dispose of the theory that the action over the past month and a half constitutes Simply an interruption in a continuing down cycle. This interpretation unfortunately flies in the face of all market history. The Dow has advanced just under 15 since the November lows. There is no bear market in the post-war period that has been interrupted by an advance of anything 1ike t his magnitude', and-,it-becomes ,therefore,-qui-te' clear-inretrospect-that4a-st—November-constituted—a bottom of some importance. The degree of that importance is the next major qestion which must be examined. Was November, 1971, like May, 1970, for example, a bottom of major cyclical magnitude This must be answered in the negative. Most of the factors common to major bottoms were conspicuous by their absence last November. The reversal, therefore, assumes intermediate-term rather than major proportions. This being the case, questions are raised about the decline which preceded the November rever- sal. Quite obviously, based on the nature of the turn, the decline cannot be called a major bear market cycle. Examination of the decline itself supports this interpretation despite the 16 drop in the averages. Too many stocks resisted the decline to suggest that 1971 was a major downswing. It, therefore, must be regarded as an interruption in an on-going advance whose genesis goes back to May, 1970 and for which the highs have not yet been seen. There is fairly well-documented prece- dent for interruptions of this magnitude near the terminal stages of upswings. The most obvious recent example is January-October 1960 which almost paralleled the recent drop both in time and percentage decline. While the above exercise may seem academic, we think it is important because it fixes us, at the present time, at a recognizable point in a market cycle, 1. e., somewhere in the advanced stages of a mature bull market. If this is, in fact, the case, the following conclusions can be drawn from the history of similar market cycles. 1) The advance, now almost two years old, probably has a limited amount of both time and amplitude rema'ining. A target of around 1050 to be reached some . . – 'tlmethis Fall is plausibie,biit.even assuming'this to be the case some three–quartrs of the move — in the major averages is already behind us. 2) The remaining phase of the advance, while not par- ticularly dynamic in the averages, could be quite exciting in terms of individual stocks, es pecially those of a more speculative genre. This can be a very exciting game, of course, but the player who decides to participate should realize the risks he is taking. 3) The final probability, as the bull market reaches a mature stage, is that we will be deluged, over the rest of the year, with optimis- tic statements about the outlook for the economy. We have already begun to see this with the emergence of a standard forecast for 1972 almost too good to be believed. We think that the up- coming year will be one to view such roseate projections with some skepticism. Dow-Jones Industrial (1200 p.m.) 904.43 S&P (1200 p.m.) 103.33 ANTHONY W. 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