Tabell’s Market Letter – August 22, 1980

Tabell’s Market Letter – August 22, 1980

Tabell's Market Letter - August 22, 1980
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TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW YORK STOCI( eXCHANGE, INC MEMBER AMERICAN STOCk eXCHANGE – August 22, 1980 Technical colleagues whose view of Jess than sanlWine have drawn cattention to the action of market breadth indicators; pOintingouf the'existence of a breadth divergence-and adduc- ing from the existence of this phenomenon a significant degree of vulnerability for the stock market. This view is not without merit. Breadth action does, in fact, raise questions, and those questions must be dealt with if one is to do a cnmprehensive job of formulating a forecast. Breadth statistics (advances and declines) have been studied for many years, and the conventional analysis is well documented. It involves the construction of a breadth index, based on advancing and de- clining stocks, which, in a healthy market rise, is supposed to confirm new highs in the averages by itself achieving new highs. Failure to do so is considered a sign of potential market weakness. Such a classical divergence is documented on lines 2 and 4 of the table below, which shows highs and lows at selected points since 1974 in the Dow, the S & P 500, and our own daily breadth index. As the table shows, both the Dow and S & P achieved new highs in April, 1976 with breadth having peaked out two months before in February. After a decline into June, the subsequent rally took both averages to new highs by significant amounts, but breadth failed to achieve a new high. This constituted the classical sort of bear market signal'BREADTH DATE DJIA DATE S & P 500 DATE INDEX 1. Low 12/06/74 577.60 2. High 04/21/76 1,011.02 3. Low 06/09/76 958.09 4. High 09/21/76 1,014.79 5. Low 11/10176 974.04 6. High 12/31/76 1,004.65 7. Low 02/28/78 742.12 8. High 09/11/78 907.74 – –9—.-f;ow——-11-1 10. High 10/05/79 897.61 11. Low 11/07/79 796.67 12. High 02/13/80 903.S4 13. Low 04/21/80 759.13 14. High OS/15/80 966.72 10/03/74 62.28 04/05/76 103.51 06/07/76 98.63 09/21/76 107.83 11/10/76 98.87 07/19/77 101. 79 03.06/78 86.90 09/12/78 106.99 1-11-1-4-17-8- -92749 10/05/79 111.27 11/07/79 99.S7 02/13/S0 11S.44 03/27/80 9S.22 08/15/80 125.72 12/06/74 02/24/76 06/02/76 09/22/76 11/10/76 07/22/77 03/06/78 09/11/78 08/31/79 11/07/79 01/28/S0 03/27/S0 08/15/80 997.68 1,092.36 1,074.23 1,091. 39 1,079.62 1,106.76 1,083.86 1,121.14 l,098.9S 1,044.12 1,067.09 1,009.74 1,065.41 A bear market did, indeed, ensue. The Dow declined from Over 1000 to 742 and the S & P from 101 to under 87 as shown at line 7. However, breadth behavior was strange and unprecedented. Breadth reached new highs in July, 1977 (line 6) despite total failure on the part of either average to approach its old high on that rally. Although the averages collapsed in the fall of 1977 and the spring of 1975, the decline in the breadth index was minor and the first leg of the subsequent rise, shown on lines 7 and S in the table, brought breadth to a level which constitutes its high to date, despite the fact that the related highs for the averages were considerably lower than peaks reached subsequently. Lines 9 and 10 of the table show the Halloween Massacre which reached its low in mid-November, 1975, and the subsequent rally in 1979. The Dow recovered almost all the ground lost, the S & P made a new high, but breadth conspicuously failed to do so. The decline and rally on lines 11 and 12 show the new peaks achieved in the indices early this year with breadth remaining below its peaks of late 1978 and late 1979. Yet again, on the last two lines, the phenomenon has repeated itself. The best rally of the series has taken place on the averages, carrying both to post-1978 highs and the S & P to an all-time high. The breadth index, however, has remained below no fewer than three prior peaks stretching back over a two- year period. The question is what are we to make of this. It can, of course, be construed as a divergence in the classic sense. The problem is that, as far as breadth is concerned, a sort of mini-bear market has, in fact, alredy taken place. Breadth had retreated, as of last April, almost back to its low of late 1974, correcting just about all the subsequent advance. It is, at least, conceivable that the breadth correction that never took place in 1976-78, when the averages fell sharply and breadth hela firm, finally arrived in 1978-80, when the averages performed relatively well and breadth indices collapsed. Such an interpretation is admittedly less than an obvious one, and it is certainly one open to argument. It must be supported, in our view, by reference to cycle theory, an exercise we intend to attempt in future issues. It, nonetheless, does succeed in explaining the behavior of breadth without the sort of bearish prognosis which conventional analysis would call for. Dow-Jones Industrials (12 00 PM) S & P Composite (12 00 PM) Cumulative Index (8/21/80) 963.23 126.56 971. 46 ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL AWTsla No statement or expression of opinion or any other molter herein contOlned IS, or 1 10 be deemed to be, dHecl!y or mdHec1ly, on offer or the sol'cltatlon of on offer 10 buy or sell ony scc;urlly referred 10 or mentioned The mailer Is presented merely for the conVCllencc of the subscriber Whilo we believe the sources of our informatIOn to be relloble, we In no way represent or guarantee the accuracy thereof nor of the statements mude herem Any action to be tolen by the subscriber should be based on hiS own investigation and Information Janney Montgomery Scott, Inc, as a corporahon, and Its officers or employees, may now have, or may later toke. positions or trades In respect to ony seCUrities mentioned In thiS or any future Inue, and such p051lion may be different from anv views now or hereafter e)(pressed 1n thiS or any other Issue Janney Montgomery Scot!, Inc, hlCh IS f(!glstered With the SEC as on Investment adVisor, may give adVice to Its Investment adVIS(;Hy and othel custam(!U Independently of any statements mode In thl or In any other Issue Further ,nformation on ony security menl!oned nereln IS available on request

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