Tabell’s Market Letter – May 30, 1986

Tabell’s Market Letter – May 30, 1986

Tabell's Market Letter - May 30, 1986
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'1TLiu'(!UE n..n..' s 1ilfIlIRl rE'1T L.rE'1T'1TrElRl 600 ALEXANDER ROAD, PRINCETON, NEW JERSEY 08540 MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 987-2300 ,, I.. May 30, 1986 -As, the majorJverages or-.some. of-themat any-rate)-go-sailing—on-to new highs.–there seem – -, to be developing two schools of thought as regards market forecasting. The first of these can be characterized as the it's-going-to-go-up-forevertl school which tends to gain more adherents the longer it proves to be the apparently correct one, which, of course, it has managed to do for some four years now. The second view, which, while losing adherents, manages to retain its die-hard supporters, can be referred. to as the early-puritan school of analysis. The rationale for this coterie of gloom-and-doomers has always been that a bull market constitutes a form of debauchery for which there must ultimately exist retribution in the form of fiancial damnation. Technicians, within limits, tend to be more sympathetic to the former view, since one of the basic tenets of technical work has always been that an established trend tends to remain in force. We have invariably been forced to recognize, however, that, at some point, a trend can become overextended, and a corrective process may become required. Our own stance of late has been to place ourselves somewhere between the two extremes mentioned above. The market has reached a stage. we think, where dogmatism, in either direction, becomes unwise, and it is best to allow the market to tell its own story. This got us into trouble last week. We tried in our last issue to explore the possibility that the Dow, which, since March, had shown some loss of momentum, might be in the process of forming a modest top formation. We did note that such an interpretation was far from a certainty, and the wisdom of this particular hedge was almost immediately validated by this week's move to new highs. Concerning this move, a few factors must be noted, which, for the time being at least, may tend to raise some doubts. The high remains unconfirmed by breadth–which reached its peak back in mid-April–although we are unable to get unduly worried about this failure, since breadth indicators have behaved well enough to confirm new peaks with any market strength. We cannot, however, say that we are terribly impressed with the 190 new highs, fewer than ten percent of issues traded. posted on Wednesday. Nor does what is, so ff!!J a succession of three lower highs, in March, April, and May, in both the Transport and Utility'averages, engender a great deal of confidence. We admit. we are purposely, here, being picky. All the indicators mentioned above are designed to provide fairly significant lead times on peaks in the averages. Since most of them have not yet provided anything like definitive sell signals, it is undeniably best to continue to assume that the course of least resistence remains upward. Nonetheless, the forecaster can be pardoned for being less confident of this particular scenario than might have been the case a couple of years ago. The investor, along with the forecaster. may also, as the upswing continues, be forced to live with a greater level of discomfort than that to which he has been accustomed in recent years. The basic tenet of modern portfolio theory and the capital asset pricing model suggests that excess returns are achieved only by the assumption of excess risk. There is a good deal of theoretical truth to this formulation, but we have never accepted the purists' reasoning that it holds true in all times and all places. The early years of the 1982-198 bull market were a perfect example of a period when this particular law somehow got suspended. By and large, superior returns tended to be earned by a whole bunch of stocks, mostly consumer-related and interestsensitive, which should, theoretically, have gone up a great deal less than the market as a whole. As the stock market advanced, large numbers of issues, many trading over-the-counter, whose historical beta-coefficients were huge, were totally failing to participate in one of the greatest bull markets in decades. We enjoyed, in other words, a period when the investor could sit back with confidence holding a portfolio of high-quality stocks and still enjoy above-average returns. We doubt that this comfortable situation will continue as 1986 wears on. We would expect the theoretical construct to reassert itself, so that. if excess returns are to be achieved. it will have to be in secondary stocks. It seems to us, moreover, 'perfectly pardonable to be somewhat nervous about such a switch at a time when the market has already moved up close to 150 percent. The path of least resistence, unquestionably. remains the upward one, but the unusual momentum that has characterized the bull market to date is unlikely, we think, to prevail throughout 1986. AWTvfl Dow-Jones Industrials (1200 noon) 1887.33 S. & P. 500 (1200 noon) 247.59 Cumulative Index (5/29/86) 3202.71 ANTHONY W. TAB ELL DELAFIELD. HARVEY, TABELL, INC. No statement or expression of opinion or any other matter herein contained IS or IS \0 be deemed to be dlrectty Of indirectly, an offer or the soHcltabon of an offer to buy or sell any security referred to or ment loned The matter IS presented merely for the convenience oj the subSCriber White we believe the sources of our information 10 be reliable, we In no way represent or guarantee the accuracy thereof nor 01 the statements made herein Any action to be taen by the subscriber Should be based on his own inVestigation and Informal Ion Delafield, Harvey, Tabell Inc, as a corporation and Its oilicers or employees may now have, or may later take positions or !fades In rcspect to any secufilies menlloned In thiS or any luture Issue, and such POSition may be dlHerenl from any views nowol helca/ler expressed In thiS or any other Issue oela/leld Harvey Tabell Inc, which IS registered With the SECasan Investment adVisor may give advice to ItS Investment adVISory and other customers independently of any statements made In th1S or In any other Issue Further Information on any secunty mentioned heteln IS available on request

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