Tabell’s Market Letter – June 11, 1976

,————————————————————————— TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON. NEW JERSEY 08'1540 DIVISION OF MEAfo!lER NEW YORI STOCI( EXCNANGE. INC MEMBER AMERICAN STOCK EXCHANGE – ., June 11, 1976 Stock market commentators, ourselves included, have a well-known propensity for coming I.,… …..,I-..'–upwith..tlJ.e…Y'rong an.w,erserl1a.Pljan.eve!lless.,forgb'C.e.abJe..in,hg..vgr ,is-thatptllskintl)fL!ITtong questions. We suspect our own guilt in this rega'rd insofar as the last few -issues of this letter are co- cerned and would like herewith to make some attempt at expatiation. Much of our recent comment in this space has concerned itself with the March-May trading range in the major averages, the subsequent downside breakout from that range and the suggestion that this breakout may be a harbinger of lower prices over the intermediate term. This sort of discussion is not, of rourse, totally useless, since it is both necessary and desirable in portfolio management to operate wlthln the framework of a near-term hypothesis. Yet lt totally fails to address itself to what should be the most basic and cruclal question facing the stock market analyst in the mid-1970's — the question of whether the flat secular trend which has imprisoned the stock market for more than a decade ha s come Or is about to come to a n end. We drew attention to thls phenomenon 5 1/2 years ago when, on January IS, 1971, we said in this space, the equity market from 1942 until 1966 was buoyed by a secular uptrend advancing at the rate of about 9 a year on the Dow. Sure, there were bull markets and bear markets within the frame- work of that uptrend, but the bull markets were long and dynamic and the bear markets, although painful, short and quickly recovered. There is real evidence, at the moment, however, that the secular uptrend is no longer with us. Indeed, computed from 1966, the slope of the DJIA has been virtually zero. The most statistically accurate description of the market on average for the past five years is that It is a wide, flat trading channel. As everyone is by now aware, the intervening 5 1/2 years have conformed precisely to this pattern. The question of continuance or noncontinuance of the flat trend is to our mind absolutely crucial, for, as long as it continues, market timing and the shifting of portfolios between stocks and –ecashw.ilLbe.a!l.absoluteneces.sityiLab9y.e-ay.eageiml.esJmenCr.llsJ,ltsAr.e,obe''ttil.ined……li,o'1lnwt''1hec,.. ,I…… other hand, the flat secular trend shifts to the sort of uptrend which characterized the 1940's; 1950's and 1960's, timing will become far less crucial,and stock selection, as was the case ten to thirty years ago, will become the more Important component in the Investment equation. There is, qUlte obviously, no clear evidence at the moment of an.end to the flat secular trend. Indeed, the market's Inability to penetrate the 1000 level a few months ago fits squarely into the pattern. Ironically, however, the prospect of near-term weakness places the market in a stronger position to break out of the trading channel than would otherwise have been the case. A move significantly above 1000 early this year would have taken place in the obviously mature stages of a bull market leg, and would thus have had to be regarded with some scepticism.On the other hand, if the market now, after an intermediate-term decline or consolidation, turns around and rebases, embarking on another upleg Significantly above the 1000 level, we would have a fairly strong harbinger that a new investment era had, indeed, arrived. Such a move if, as and when it takes place, would be the third upward leg in a bull market which began in December, 1974, and,according to the tenets of a number of cyclical theories, the presence of three rather than two upward legs denotes a move in conformity with a primary upward trend. It is also possible to advance some fairly solid fundamental arguments that a new era may be in the offing. The period between 1949 and 1974 can be viewed in one sense as a complete cycle in terms of multiples which investors were willing to place on corporate earning power. That cycle began with the Dow selling at seven times earnings in the summer of 1949 and advanced to a point where it sold for 24.2 times earnings at the end of 1961. The multiple, in tum, steadily deteriorated to the third quarter of 1974, to the point \\here Sl.OO of DJIA earning power could be purchased for S6.20. Some scholars have adduced evidence that this sort of long-term cycle is a continUing one,and,lf this is the case, the prospect Is for a decade-Iong.risein baSIC multiples which. could not fail to carry.the.Dow far, farbove the,IOOO mark. An ultimate return to the 24-times earnings level of 1961, coupled with a 100 rise in current earning power, ..- would bring the Dow close to 5000. This Is not being offered as a forecast,but we do not, on the other hand, see why it should be viewed as fantasy. It would merely require the repetition of two phenomena, both of which have occurred during the investment lifetime of most readers of thiS letter. It is, thus, basically the question of the end of the lO-year, secular stagnation With which market forecasting should now be primarily concerned. It is a question on which we shall continue to comment in the future. Dow-Jones Industnals (1200 p.m.) S & P CompOSite (1200 p.m.) Cumulative Index (6/10/76) AWT/jb 969.06 99.99 581.68 ANTHONY W. TABELL DELAFIELD, HARVEY, TAB ELL No Ilalement or expressIon of oplnson or ony other motter herein contolned IS, or IS to be deemed to be, directly or mdHcc1ly, on offer or the soliCitation of on offer to bvy or sell any secunty referred 10 or mentioned The moiler 15 presented merely for the conver.cncr of the subSCriber While -He betleve the sources of our Informa tlon to be reliable, we 10 no way represent or guarantee Ihe accurocy thereof nor of Ihe statements mude herem Any action 10 be token by the subSCriber should be bosed on hiS own investigation and information Janney Montgomery Scott, Inc, as a corporation, and Its officers or employees, moy now hove, or moy lotcr toke, polIons Ot trode! 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