Tabell’s Market Letter – July 12, 1974

–,– – \ TABELL'S MARKET LETTER '-,, 909 STATE ROAD. PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW YORk STOCK EXCHANGE, INC MEMBER AMERICAN STOCK EXCHANGE July 12, 1974 Monday's 21-point drop m the Dow-Jones Industrial Average, which saw that venerable index follow most –other'ma j or market'oarorrfetets-to-'a-Iow BelOW'fljii('orlilSTDecernoer; Ra''-;-,thoutdouJ5Ccalteredthe techi – cal picture, although not in as fundamental a degree as many might suspect. The penetration of the December low on July 8 marked only the second time since 1926 that that low has been penetrated so late in the subse- quent market year. The only other case was penetration of the December, 1928 low in October, 1929, a iact, we hasten to add, that has, in our opinlOn, absolutely no statistical significance. The llkelihood now, of course, is that the market .s headed lower, at lea st over the short term. Th.s re- mains true despIte Friday momingls sharp rally In response to a slowed nse in business loans. It is necess- ary to have some working hypothesis as to Just how low that might be. Here there .s very little change. For the Dow and most other mdices, the applicable distributlOnal tops were formed m 1972 and 1973, and these tops were violated on the downside la st December. The trading range In which most indices held throughout the first six months of 1974, the limits of which, m the Dow's case, were the December low of 783.56, and the March high of 904.02, did not widen the previously formed tops, although that range apparently faIled to turn out, as we must confess we hoped it mIght, into a saucer-type base formation. It, therefore, appears that the original downside targets which were .dentifiable fairly early last year are now likely to be fulfilled. For the Dow ,most of these targets center on the 740-680 range which, quite obviously, is not all that far be- low current levels. Downside objectives of similar percentage magnitude exist for the other IndIces. For the Dow-Jones Transportation Average, for example, the downSIde objectlve IS an apparent 135-115 versus the current level of 153. In the case of the broad-based mdlces, the Standard & Poors 425-Stock Industrial Index has a down- side objective of 83 versus its current level of 92, and the Standard & Poors 500 suggests a possible 74. For the New York Stock Exchange mdex, now 43, a downside target of 40 .s readable. It .s, of course, qu.te possible that these forecasts might,have to be altered,should the recent advance demonstr.te9Jll-'ayJn9 power. More evfdence, -however, will certaInly-be requIred. – – .- All of the above numbers have a certain conSIstency 10 that they suggest, In all cases, a test of the lows of May, 1970. Such a test, incidentally, would be perfectly consistent w.th the longer-term hypothesis we have been proposing in th.s space for the past three years, the theory that the basic secular trend of the stock market has changed from the rising channel which charactenzed the 1940's, 1950's and early 1960's, to a flat channel, centered around the 850 level m terms of the Dow, with llm.ts roughly a couple of hundred points on either s.de of that level. We do not, In other words, place ourselves in the camp of the super-bears. We think analYSIS of the technical patterrsof mdiv.dual .ssues strongly suggests that the bulk of them are suff.ciently thoroughly sold out so as to prevent them from mOVIng a great deal below current prices, although quite obviously they could be vulnerahle to short-term weakness. We also think that the apparently-huge amounts of money now on the sidelines mitigate against the suggestion that we are headed for some sort of apocalypse. We do, how- ever, think that a good deal of vulnerabIlity remains for a faIrly extensive minority of mdividual stocks, most of them those glamour issues whIch have not yet had corrections comparable to those which have affllcted the bulk of the ilst. LIke the averages, most of these Issues spent 1972 and r973 forming substantial top formatIons and, lIke the averages, penetrated these top formations on the downside last December. Some of them, and 111e nantes are sufficiently obVIOUS so that they do not need to be recounted here, did, indeed, move lower In the first six months of 1974 and are at or approaching theIr downSIde obJectIves. A number, however, Including many in the drug and off.ce eqmpment helds, staged a m.ld rally In the first half of this year and moved up mto the overhead supply from the 1972-73 tops. There are very few cases that we can recall where the princ.ple of overhead supply has been better demonstrated than by the action of the past few weeks. Almostuniformly, on the recent decline, the growth Issues that had moved up Into the overhead supply backed off sharply from that supply on the recent drop, and now hnd themselves posseSSIng short-term patterns which suggest a move to new lows and dn ultimate extension of thdt move to the downside objectives of the angInal tops. These objectives, it must be noted, are in many cases substantially below current levels. I\s our readers are well aware, we have always been philosophically opposed to the pnnciple that a hand- ful of select Issues, rightly or wrongly tagged as growth stocks, should sell at an immense premium over the bulk of the list. The past year or so has done a great deal to destroy that nahan, and technIcal patterns now suggest that the next few months could see the final demise of the myth. We do not, In sum, see any reason, In practIcal terms, to worry unduly about further short-term weakness in the market prOVIded that portfolios are protected by rigid exclusion therefrom of as-yet-uncorrected growth lssues. Dow-Jones Industrials (1200 p.m.) 778.16 ANTHONY W. TABELL S & P Camp. (1200 p.m.) 82.04 DLLArILLD. HARVIY, TABrLL Cumulative Index (7/11/74) 449.79 AWT/jb No slotement or expreSSion of opinion or any other matter herein contomed IS, or IS to be deemed to be, dlfectly or indirectly, on offer or the wlicltatlon of on offer to buy or sell any secunty referred to or menlloned The matter IS presented merely for the COnVerienCE of the subscriber WhIle we believe the sources of our Information 10 be rellCble, we In no way represent or guarantee the accuracy thereof nor of the stotements ,ode herem Any achon to be loen by the subscllber should be bocd on hl5 own InvestlgollOM and IIlformoflon Jonny Montgomery Scott, nc, 0 a corporation, and Its officers or employees, may now have, or may laler toke, positions or Irodes In respecl to any secuntles mentioned In Ihls or any fulure ISwe, and such position may be dlfferenl from any views now or hereafter expressed HI Ihls or any other Issue Janney Montgomery Scott, Inc, whIch IS regIstered wllh Ihe SEC as an Inveslmenl adVisor, may give adVICe to Its Investment adVisory and othel CUSTomers Independently of any stalements mode In Ii-liS or tn any olher uSUe Further Information on any securtty mentioned herein 1 available on request