Tabell’s Market Letter – February 03, 1978
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— TABELL'S MARKET LETTER I I \ I I I ..J 909 STATE ROAD, PRINCETON. NEW JERSEY 08840 DIVISION OF MEMBER NEW YORK STOCK eXCHANGE, INC MEMBEA AMERICAN STOCK EXCHANGE February 3, 1978 yv e C5l'!l!1ted !.t ve1 n tl1l3 emergence f w1'!at is, i effest, the ,new o-ter mar- tne oiket- tryingto underscore 'theiil'most completefaCk' of 1lIstor1cianli'ecedentfor 'sort behavior that— has been taking place In equity markets for the past year and a half. That behavior has produced on- going declines In the Widely-followed market Indices which, by historical standards, qualify as major bear markets. Concomitant with these declines, there has existed highly satisfactory upside be- havior on the part of a significant number of secondary Issues and, Indeed, for a great part of the period In question, an ongoing bull market for Indices constructed to reflect the behavior of this sort of Issue. The Initial response of the seasoned market observer Is that this sort of thing cannot happen — by which he means It has seldom, if ever, taken place In the past. Secondary stocks, we know from experience, tend to possess higher volatility than first-tier Issues and to move down- ward more rapidly In bear markets. Thus, at first blush, the sort of behavior which characterized most of 1977 could be expected to be Impossible. A look at the numbers, however, suggests that this attitude Is based largely on preconception and that there Is no real reason why the current sort of divergence Is not perfectly plausible. To begin With, there were, at the end of 1977, slightly more than 26 billion shares available for trading on the New York Stock Exchange, the common stocks among those shares having an aggregate market value of 771 billion. Thetotal number of Issues Involved was, roughly, 1450. Meanwhile, the common stocks In the S&P 500 had approximate market value of some 550 billion, Or 75 of the total. There were, thus, well over 1000 Issues available for trading constituting less than one-quarter of the total market value on the New York Stock Exchange. The skewed distribution of market value Is exaggerated even further by the fact that the distribution within the S&P Is Itself biased. A bit more than 80 Issues In the 500 account for some two-thirds of the market value of that . iJ!dex. Byextension,.theyaccount,l1kewJsJ3.foLhaILthe markeLv.alu,e.otaILl1sted.issues .We,'''''' I have, In other words, half the market value on the Exchange concentrated In some 80 stocks and the other half spread around among the remaining 1370. That a discrepancy between these two segments of the market could exist should not, theoretically, be all that surprising. What has been taking place, in other words, Is the exodus of rather massive amounts of dollars from the equity market scene. This has been reflected in lower prices for major listed com- panies and by lower levels for the Dow and the S&P 500. There is, however, no reason why a rela- tively small number of dollars cannot cause firm-to-upward price movement in Significant numbers of stocks even as the dollar outflow from equities continues. This is, apparently, precisely what has been taking place. There are, obviously, a large number of reasons that can be adduced for the dollar out- flow. However, certainly a major factor is the reduced level of Institutional support for equities of the sort which produced the bull markets of the 1950's and 1960's. This was a period when Institu- tlons, especially pension funds, enjoyed a huge net cash Inflow and which began with those Institu- tions relatively undercommltted to common stocks. Thus, over a period of two decades, Institutions Increased their equity commitments by investing an amount greater than their cash flow In the stock market. Equity holdings, however, reached a saturation point by the late 1960's and early 1970's. While cash Inflow continued, by and large, a smaller portion of that cash moved into stocks, thus reducing the level of institutional support. One of the results of this process was that, by 1974, the historical price level of com- mon stocks in relation to earning power had reached nearly record-low levels. Recognition of those levels, unsurprls1ngly, attracted some buying interest for equities. To date, however, that buying interest has been of a dollar amount Inadequate to 11ft the total market value of all stocks, especially those Institut.lonal-quaUty,stocks,comprlsing the bulk of l1sted'dollar valueIthas; on the other— hand, been sufficient to spread among a large number of Issues constituting a relatively small fraction of total exchange market value. Thus, the strange two-tier effect of 1977. Just how long this process can go on and what sort of market It might wind up producing Is still another fascinating question, one we hope to explore further at a later date. Dow-Jones Industrials (1200 p.m.) S & P Composite (1200 p,m.) Cumulative Index (2/2/78) AWT/jb 771. 92 89.83 651. 39 ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL No statement or expression of opinion or any olher matter herein contall1ed IS, or 15 10 be deemed to be, directly or Indlrectlr,' on offer or the 501lcllollon of an offer 10 buy or sell any security referred to Or mentioned The matter 15 presented merely for the conVel'lenCE of Ihe subSCriber Wh, e He believe the sources of our Informo- lion to be reliable, we In no way repre5ent or guarantee Ihe accvracy thereof nor of the statements mude herein Any action 10 be taken by the subscriber should be based on his own Inveshgatlon and InformatIOn Janney Montgomery Scott, Inc, as a corporation, and Its off,cers or employees, may now have, or may later lake, positions or trades In respect to any 5eCUrilies mentioned 111 thiS or any future Issue, o'ld such POSition may be different from any views now or hereafter expressed In thu or any other Issue Janney Montgomery Scott, Inc, whICh 15 regIStered ,,,11th the SEC as an Investment adVisor, may give odvlCe to Its ,vestment adVisory and other customers Independently of any statements made ,n th,s or In any other Issue Further Information on any secufl'y mentioned herein 15 available on request