Tabell’s Market Letter – June 06, 1980

, TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW VORl( STOCK EXCHANGE, INC MEMBER AME RICAN STOCK EXCHANGE – June 6, 1980 — O W ' . F'- ' – -;- One of the more faniiliar s'tock'–market aphorisms is that 'a given- market does not seem'to want to- go down. Imprecise as this phrase may be, it nonetheless constitutes an accurate -description, and it can certainly be applied to market action over the past couple of weeks. After having advanced some 100 points from the double closing bottom around 760 recorded on March 27-April 21, the Dow embarked upon what could have been a correction with a 14-point declme on May 29. A normal rebound from that decline last Friday was followed by two declining days to a modest new low of 843.77 on Tuesday of this week, followed by a 14.25-point advance on Wednesday. Thursday's trading had moved the aver- age back to new high territory before profit-taking set in late in the day. The apparent lack of desire to go down remains, for the time being, apparent. There is some irony in all this since the apparent trigger for the latest rally was the official an- nouncement by the National Bureau of Economic Research that January, 1980 constituted the beginning of the seventh recession m the United States economy in the post-World War II period. This recession has, for the past two years, been the most widely advertised non-event since the Second Coming. We have been told from many quarters over those two years that the stock market, in view of the obviously impending recession, was not the place to be. Over that period, the market, with its usual perversity, tended to act rather well. Finally this week, with the actual emergence of the long-awaited Armageddon, the market's response was a move to new highs for the current rally. It is not our intention with these comments to minimize the significance of the official onset of the recession, although we do think the action of the past two years demonstrates once again the utter futility of trying to mix economic prediction and stock market prediction. The recession does, we think, have some importance in an attempt to determine just where we are in the present stock market cycle. It must, first of all, be noted that the dating of the present economic contraction is, at least, interest- ing, and we must confess to lack of total agreement of those august gentlemen who picked January, 1980 as a precise start'date. As- we hoted in.tms space three weeks ago;' the NBER's own mdex otCOinaaent- -,- economic indicators peaked in March, 1979, and various other indices commonly associated with recession peaked somewhat earlier than that. An honest reading of figures on economic activity during 1979 sug- gests that the trend for the year was absolutely flat rather than either up or down, an occurrence which, we noted, was more or less without precedent in the post-war period. Under these circumstances, it seems to us, any date over a ten-month period could have been chosen as the start date for the reces- sion. For whatever reason, the NBER chose to fix on the latest date possible. This is not without significance as far as the stock market is concerned since there does, in fact, exist a relationship between recession peaks and stock market lows, the former generally leading the latter, although in many cases, by not very much. Thus the recession peak in July, 1953 preceded a stock market bottom in September, 1953, and a peak in August, 1957 led an initial stock-market low in October, 1957. Since, as discussed above, an obvious stock market bottom of some significance occurred on March 27, the two instances cited would constitute precedent for linking that bottom with a recession beginning in January. It is true that the last two recessions, 1970 and 1974, demonstrated longer lead times, but it is also true that neither of those two recessions was as well advertised in advance, nor were they preceded by long, flat periods such as 1979 where some of the correctionary forces associated with the contraction could exert themselves. We do not regard it as improbable, therefore, that, when the history of these events is finally writ, the market low of two months ago will turn out to be the one associated with the 1980 recession. Coincidentally with all this, the market, from a technical point of view, finds itself at a crucial stage. The two-month rally which we have just enjoyed has, to date, done just about all that could be expected of it in light of the base formed in April. We have been citing, for some time, objectives in the mid- 800's in the Dow, and those objectives have, of course, been attained. We now find ourselves, once more in the overhead supply between 850 and 900 which has repeatedly turned back all attempts at a meaningful advance for the past two years. , We think, in other words, the market has done all that could be expected of it in the way of a normal technical rebound, and from here on it will have to demonstrate its own intentions. Prior to the decline which characterized February-March, 1980, the entire trading range of the 1978-1980 period was looking more and more like a base formation presaging much higher levels. That prospect was temporarily quash- ed by the debacle of last winter. If the recovery from that debacle continues as impressively as it has so far, however, the hypothesis of a 1978-1980 base formation would come to have renewed validity. Dow-Jones Industrials (12 00 PM) S & P Composite (12 00 PM) Cumulative Index (6/5/80) 860.67 113.09 829.92 ANTHONY W. 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