Tabell’s Market Letter – January 12, 1979

! TABELL'S MARKET LETTER JL – – 909 STATE ROAD, PRINCETON. NEW JERSEY 081540 DIVISION OF MEMBER New VORl STOCK eXCHANGE, INC MEMBER AMERICAN STOCK eXCHANGE .'' – January 12, 1979 We expressed last week a reasonably optimistic view of the near-term outlook for equity prices, sug- gesting that the cont-inuance of a Jhe general area of 900 in terms of the Dow. Just how worked up one can become over such a prospect may in fact be – a function of how long the observer has spent looking at the stock market. To one whose market experience is confined to the past 10 years, a market which appears poised to move ahead some 10 may indeed occasion optimism. (It is even arguable, in the light of the last decade, that any market which does something other than fall through the floor consitutes cause for jubilatlon,-) There are, on the other hand, those of us ancient enough to remember that there once existed stock marKets in which 10 rallies were commonplace occurances, usually taking place as a part of bull markets in which the averages advanced 100 or more and indiVidual stocks by the droves chalked up moves which were multiples of that figure. What we are saying, of course, is that it is necessary once more to raise the basic question of whether the recent strength is simply another move toward the top part of the trading range that has contained the market averages since the middle 1960's or whether it is the initial thrust in an upswing that will eventu- ally move equity prices out of their dacde-long trading area and on to substantive new highs. Unfortun- ately, it is difficult at the moment to take the view that the latter, more optimistic, outlook is the correct one. Present technical indications, in other words, do not allow us to look beyond the prospect of a moderate improvement in price levels. This is not to say that the potential technical underpinnings which might support a major bull market are not more formidable today than they were, say, five years ago. In order to support a move by the averages to new and higher levels 'c it is obviously necessary that those stocks contained in the averages should be in a pOSition to assume market leadership. It is necessary to recall that the demand for such stocks is largely institutional and that it will require a resurgence of institutional demand to produce any move of major.1lignificance in 1he, broad range of high-capitalization issues. theAs we have been pointing out in this s'pace for ;orrie time-,- -pastfive years'-of In-stlfutlonal equity' ' market activity quite clearly show a dramatically reduced level of purchases, not 'ithout good and plausible reasons. The past half-decade has been beset with economic uncertainties entirely unpreced- ented in recent financial history. Along with these uncertainties, there has existed the availability of record-high rates of return on fixed-income instruments, raising the real question of whether the fiduciary investor was justified in assuming the substantial risks involved in the stock market. To a large extent the answer to this question on the part of the institutional money manager has been a negative one. It is possible to wonder, however, whether or not the wheel has come full circle. A decade ago the pro- spects of earnings growth for institutional-quality equities caused money managers to be willing to pay astronomical multiples of earnings for these stocks. The ironic fact is that the assessment of the growth prospects at that time wa s correct. By and large, earnings from established growth companies have spent the last decade expanding in exactly the fashion foreseen by prognasticators of the late 1960's. What has taken place is a diminution in the price paid for those expanding earning to the extent that stocks which may have sold for 50 times earnings ten years ago are available today at multiples in the viCinity of ten or less. Technically, this sort of action has produced uniform patterns. Almost without exception the high- grade growth stocks of a dozen years ago have formed huge potential accumulation bases as they have moved essentially sideways during a period of continued earnings expansion. These bases have become progressively larger and larger. QUite obviously at some time in the future, some intermediate-term upside move will begin to include large numbers of these stoCks. Observation of the market's technical action will reveal major upside c breakouts from these accuniulation taking place. It may well be that such process will not becom apparent until it is well under way, in other words, until a minor upswing features perceptibly improved technical action on the part of high-grade growth issues. It is even conceivable, we suppose, that such improving action could take place during the course of the price rebound we currently anticipate. It is, unfortunately, as we noted above, difficult to foresee more than the beginnings of such a change in market leadership. It is well, however, to keep in mind the technical potential which continues in- exorably to build. That potential suggests that the next important move in stock prices — important as contrasted with the swings of the past ten years — will be in a upward direction. Dow-Jones Industrials (1200 p. m.) S & P Composite (1200 p.m.) Cumulative Index (1/11/79) 836.63 100.06 708.72 ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL I .. ..-o-,-'h-,-.o-'-,,,—,,-o-'-,-,-0-11.-,- to buy or lell ony securlly referred to Of menhoned The motter is presented merely for the of Ihe subscriber While we believe Ihe sovrces of our Infermo- tlon 10 be reliable, we In no way represent Of guarontee Ihe accuracy thereof nor of the statements mude herein Any action to be token by the subscriber should be based on hiS own Investigation and Information Janney Montgomery Scali, Inc, as a corporation, ond Its officers or employees, may now have, or may later positions or trades In respect to any seUfltles mentioned In Ih15 or any fuTure Issue, and such position may be differenT from any views now or hereafter expressed In thIS or any other lS'ue Janney Montgomery ScOtl, tnc. which IS registered With the SEC as on Investment adVisor, may give adVice to Its Investment adVisory and othel customers Independently of Clny statements mode In thiS or In any other Issue Further Information on any security mentioned herein IS ovallable on request