Tabell’s Market Letter – May 24, 1985

TABELL'S MARKET LETTER 909 STATE ROAD. PRINCETON. NEW JERSEY 08540 MEMBER NEW YORK STOCK EXCHANGE. INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 9249660 May 24. 1985 We had the pleasure, two weeks ago, of attendmg the 10th Annual Convention of the Market Tech— …–!nls-.A!ia!ion at HIlton . S)Uth Carolina. These gatherings (we have been fortunate enough to be present -at every one over the past decade) ,are aIWays-enjOywle ana-inror-mattve-NOtonly is it .–.-' useful to be exposed to the thlnking of our COlleagues by way of their formal presentations, but it is also instructive to meet in informal gatherings and compare current market views. What \VRS most strIkIng about this sort of interchange this year was the unusual similarity of the market OpInIOnS of most of our technical brethren. and we must confess that we shared in this consensus. The four-year cycle is a phenomenon as famIliar to our fellow technicians as it is to us, and we found most of our colleagues agreeing that, in terms of this framework, the current market cycle is in a pretty mature phase. They also seemed to agree that. despite that maturity. signs of near-term deterioration are conspICUOUS by their absence and that the present short-term course of least resistence for the market is upward. The consensus, in other words, agreed m calling for higher prices — but prices not all that much higher and perSIsting for not that much longer. This, of course, is the view we have been expressing in this space for some weeks now and one we summarized just a week ago. Another principle of which technIcians are uniformly aware is the theory of contrary opinion. It is ffilr to say, therefore. that, collectively, we felt nervous at our apparent agreement. Market analysts are a perverse lot and, rightly or wrongly. they prefer to be alone in their views rather than part of a consensus. A good part of the informal dIScussion, therefore was devoted to what might emerge to make the consensus view essentially incorrect. If that consensus is for moderately higher prices, then two contrary views are possible. The rust one would call for Immediate sharply lower prices — the surprise emergence of a bear market. The second possibility IS that higher prices could indeed ensue but, rather than constituting a modest Improvement on todey's levels, they wIll be significantly higher and win persist for a protracted period of time. The theoretical underpinning for such a view would be the compressed -cycle theory to which we alluded last week. Under thIS theory. an l1unrecognlzed bear market took place between the Fall of 1983 and July. 1984 thus completing a shortened 23-month cycle which began in August. 1982. We currently find ourselves, therefore. in a bull market, not 32 months old but dating back less than a year. I–t—liQuchanupswing….quite-ob\dously–W.Ould…hsve A great….m09m …..ontheJmside '. -I It IS possible to cite a number of arguments in favor of this thesis without being -totally conVlnced by them. The first such argument would involve the action of market breadth. As we have been pOlnting out for the past ten months. breadth has generally outperformed the popular averages ever since the rise from July. 1984 began. Such out performance IS characteristic of the initial stages of a bull market. It followed, moreover, on the heels of a previous breadth divergence which had lasted from J.me. 1983 through January. 1984. That divergence. it can be argued. foreshadowed the 1983-1984 correction. completed last summer. Moreover, insofar as market breadth is concerned, it is Significant that, as of last Friday, our daily breadth index surpassed Its June, 1983 high, something which weekly breadth indicators had done early this year. Thus. there exists at the moment no breadth-divergence condition and the emergence of such a conditlon generally leads a market top. often by as much as two years. This, in turn. argues for a protracted period of better prIces. Another argument would be that, whlle it is difficult to recognize a completed bear market in the Widely-followed market indices. during late 1983 and 1984 such a condition certainly existed in large segments of the market, notably the High Technology IOver-the-Counter sector. This bear market began m June, 1983. before the decline in the averages started later that year and persisted after the listed seg- ment had bottomed, to December of last year. This out-of-gear condition thus could have helped to make the 1983-1984 bear market difficult to recognize. A final argument, which is not as perverse as It seems. can be found in the present slowdown of the economy. At first blush. this would seem to confirm the consensus theory — weakness in leading economIC indicators presaging a market which is about to top out. This is well and good, but it fmls to recognize the demonstrable fact that the market leads the economy rather than the other way around. ThtS. the 1983-1984 weakness can be interpreted as having correctly anticipated the current economIC slowdown. and. consequently. the present strength can be read as presaging economic improvement later on thIS year. FInally. there is. as we noted last week. the precedent for at least one severely compressed stock-market cycle. one runnIng between August, 1921 and July. 1923. Although this leads us into the realm of the exotic. there do. indeed, exist intriguing similarities between the present and the early 1920'S. – This is a subject which deserves further discussion at greater length. We reIterate our conclusion of last week that, fascinatIng as the above arguments are, we are not ready to be totally swayed from the conventIOnal view. While that conventional view suggests tat the market be approached with a certain degree of caution at this stage, it still calls for an aggresslvely- Invested pOSItion. one which would be equally conSIstent with the contrary theory outlined above. AWTrs Dow-Jones Industrials (1200 p.m.) S & P Composite (12.00 p.m.) Cumulatlve Index (5/23/85) 1297.93 187.82 2474.51 ANTHONY W. TAB ELL DELAFIELD. HARVEY. TABELL INC. NO statement or e,,-prC5Slon 01 opinion or any other matter herein contained IS or IS!O be deemed to be dlfecllyor Incilrectty, an ofler or the soliCitatIon of an offer to buy or sell any secunty relerred 10 or mentioned The maum IS presented merely lor the convcnlcnceof Ihe subSCriber WhIte we belIeve the sources of Our information to be reliable we m no way represent or guarantee the accuracy th(!flwf nor of Ihe statcmerl1s made herein Any aC!lon!o be taken by the subscflber should be based on hIS Own Investigation and Information Delafield, Harvey, labell Inc. as a corporation and I!S oltlcers or employees may now have or may laler take POSitIons or trades In respect to any securttles mentioned In this or any future Issue, and such pOSitiOn may be dlif(!rfnt Irom any views now or helealter eJCpmssed In thiS Or any other Issue Delafield, Harvey labell Inc wh,ch IS reglslered With the SECas an Investment adVisor, may gIve advice to Its if'lvestmenl fHlVlsory and other customers mdependently of any statements Inade In thiS or If1 any other Issue Further Inlormatlo on any secufltv mentioned herem IS available on requesl