Tabell’s Market Letter – December 27, 1985

TABELL'S MARKET LETTER 600 ALEXANDER ROAD. PRINCETON, NEW JERSEY 08540 MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 9872300 December 27, 1985 A forecast for 1986 inevitably recalls the cliche about good news and bad news. To give the I ood neWB– first,…,. we -think-t-hat-the-market .–'-next-!-year.is..Jikelytogo firsthigher and…thenlower. – The initial, optimistic part of that forecast is based on the simple fact that I from a technical point of view, it is highly unlikely that the extraordinary upward momentum developed during fall,1985 will dissipate quickly. Market tops generally require a protracted period of time to form and the actual high is generally not made on the initial thrust. Furthermore, higher objectives, in the 1700-1760 range, exist for the Dow,and it would be plausible to expect these targets to be attained on a continuation of the current move into early 1986. Having gotten the good news out of the way, it is necessary to look at the less-than-glad tidings. We think that a cycle top is likely to form sometime during 1986, followed by a full-scale, bear-market correction. Our readers are familiar with the rationale behind this forecast. They know that we are believers in the major-cycle pattern, popularly known as the four-year cycle I and the consequent belief that the rally which continued through last Friday was part of a bull market now 42 months old. It is possible to project the upward phase of this cycle as far out in time as summer-fall, 1986. To extend it further would be straining credulity. This thesis of cycle maturity is reaffirmed by the fact that the bulk of issues which have provided the leadership in the current bull market are at, or approaching, long-term upside targets. The bad news, however, may not be all that bad. In setting out the historical background for our forecast last week, we reiterated the obvious fact that, with the market at an all-time high. some 50 above its previous peak, we find ourselves in a new super-cycle environment entirely different from that which prevailed during the 1960's and 1970's. The bull market so far has demonstrated many of the characteristics of an earlier era. the one during and following World War II. Bear markets of that era were often mild. (1953, for example, saw only a 13, nine-month decline in the Dow.) It is quite possible that the sort of correction we look for in the latter part of 1986 could be a good deal less severe than recent experience would lead us to believe. Whatever the shape of the 1986 1983 High 1984 Low 1985 HIgh market pattern, we think it likely to involve a' shift ,liose details are 'not- yet S -S ' &&PP 500 Consumer -Goods – -116678T.5I7 144.33 205.96 —1'13-c65—-z22783- .,…- – h , , – I totally clear, in market leadership. The S & P Capital Goods 185.30 155.81 211. 90 table at right traces the performance of S & P Oil Composite 163.85 150.40 204.63 five major indices, all adjusted so that NASDAQ OTC Industrials 229.83 140.74 185.65 their 1982 low is equivalent to 100. It demonstrates that consumer -goods, or, more properly, dismfla- tion-hedge issues, despite their supposed lesser volatility. have constituted a good portion of the up- side leadership in the current market. Basic-industry and energy issues generaQyhave tended to under- perform, and smaller stocks, leaders through 1983, topped out at that point and remain well below their highs. It seems to us highly likely that. during the market transition we envison, one or more of these groups, basic-industry, energy, and OTC/high technology. will regain investor favor. This could come to pass in a number of ways. The issues involved could assume leadership during the terminal phase of the present upswing and prove to be relatively defensive during the following correction. Alterna- tively, the emergence of new upside leadership could be deferred until the inevitable start of the next major upward cycle. Thus our 1986 forecast involves a year of transition, a continued bull market followed by a major correction with the process being accompanied by a shift in market leadership. As with any forecast, it is necessary to examine those factors which would invalidate it. Obviously, it would be called into ques- tion by the lack of appearance, durmg 1986, of the loss of breadth and momentum, which, based on cycle analysis, one would expect to emerge. This would suggest the alternative interpretation.of the m6.jor- cycle pattern previously discussed in this space, which would date the bull market from July, 1984 and thus give it considerably longer life. While we do not expect this to happen, We should be prepared for it. This, fortunately, is easy to do. The most plausible forecast, outlined above, calls for continued strength well into 1986. The obvious posture to take advantage od' such strength is that of a fully in- vested position, and it is with such a position that the investor should, in our view, enter the new year. Perhaps-.-more than in most years, however, he should couplethat position with a degree of alertness. The formation of a major top during the forthcoming year. albeit a process which has barely. if at all, begun, remains, we think, a fairly strong likelihood. Dow-Jones Industrials (12 00 p. m.) S & P Composite (1200 p.m.) Cumulative Index (12/26/85) 1536.01 208.87 2668.86 ANTHONY W. TAB ELL DELAFIELD, HARVEY, TAB ELL INC. WE WISH YOU ALL A HAPPY AND PROSPEROUS NEW YEAR No statement or expression 01 opinion or any other matter herem contained IS, or IS to be deemed to be, dlfectlV or Indirectly, an otter or the solicitation ot an oller to buy or sell any security retorred to or mentioned The matter IS presented merely tor the convenience 01 the subSCriber While we believe the sourcesot our Intormahon to be reliable we m no way represent or guaranteo tho accuracy thereot nor ot the statementS made herein Any action to be taken by tho subSCflber should be based on hiS own inveStigation and mtormatlon De\aUeld, Harvey, Tate!! Inc, as a corporatIOn and ItS otllcels or employees may IlOW have, 01 may later take, poSitions or trades m respect to any securl\les mentIOned In Ihls 01 any future Issue, and such POSition may be dl11crent Irom any views nowor hereal1er expressed m thiS or any other Issue Delafield Harvey labeli Inc which IS registered With the SEC as an mvestment adVisor, may give adVice to ItS Investment adVISOry and other customers mdependently of any statements made In thiS or m any other Issue Further mformatlon on any secu/.ty mentioned herem IS available on request