Tabell’s Market Letter – August 15, 1986

T I.ii.\liHEIL.IL.'S I.ii.\IRl l E T D..lETTIEIRl 600 ALEXANDER ROAD. PRINCETON, NEW JERSEY 08540 MEMBER NEW YORK STOCK EXCHANGE. INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS. INC (609) 9872300 August 15, 1986 1–….,…-1 n…Jig h t-of–recent …mar..ket… ac.tion ,….it.lD.!l-ybe..w.qr.th whil….t9….Sum!!!e.-S-'!II!eof….the-.opJnions …exp r.essed—- in this lett-er in the'past'four moflths'-' .-.- – . . – – .- -.. . On May 23rd, we first noted the deceleration in the astounding rise, which, at that point, had taken the Dow from 1300 to 1850 over an eight-month period. We also noted, the two benchmark peaks that had, by then, formed, the first in early March, and the second in mid-April. We noted that this configuration possessed at least the potential of being a top formation with an ultimate downside objective in the low 1600' s. (It has since, of course. broadened.) Two weeks later, on June 6th. we asserted that the market seemed, on an intermediate-term basis, to have reached an overbought position. The following week. on June 13th, we noted the achievement of yet a third benchmark high in most averages, around the end of May, and, in a fairly detailed discussion of major market in'dicators, pointed out, some of the divergences that were, by then, beginning to develop. We pointed out the poor relative action of the Transportation issues, creating a classic Dow-Theory divergence, and noted that breadth indices had peaked in mid-April and subsequently declined Sharply. By that time, we suggested, it was possible to date the sea-change in market behavior with some degree of precision, the transition having taken place on March 27th, when almost all major averages peaked simultaneously, the high in the case of the Dow having been 1849.74. On July 3rd, which happened to be the day after the Dow made its all-time high, we presented a statistical study noting the narrowing of leadership and suggested that the strength of the averages was masking what appeared to be considerable weakness on the part of individual stocks. The following Monday produced the now-famous 62-point Dow decline in response to predictions with which, in light of the top that had by then formed, we could not find ourselves in serious disagreement. We did, however, at that time, pOint out the fact that shorter-term objectives seemed to be centered around the 1770-1760 area. Also, in the following week's issue, we indicated that the free-fall phase of bear markets seldom occurs immediately after the high is reached. We noted that in 1 – —-sevenofl.-the–ten….cycte–bearma-rket5-since-'-t946 that, following the initial decline, the liiarket-L——-I subsequently returned to within 2 of its previous high within periods ranging from 2 to 14 months. Last week, while reporting the continued long-term deterioration, we cited as yet another mitigating factor some evidence of rotation of leadership on the downside and also pointed out that the two major previous benchmark lows of early April and mid-May were, for the time being at least, successfully tested. As we now know, the Dow reached a low, on August, 1st, of 1763.64 and rallied, in a space of just under two months, to Thursday's close of 1844.91, within 3.3 of the July 2nd high. Now we are not, in all honesty. engaging in the above recital to prove that. in some form or another, we were right on the market. We hope that, in 30 years of market commentary. we have developed the humility which goes with all too often having been absolutely and gloriously wrong. The point we are trying to make is that, over the past 5 months, evidence concerning a plausable market forecast and a resultant appropriate investment policy has gradually been accumulating. What we want to emphasize is that nothing to contradict that chain of evidence has emerged. By the highs of the middle of the week, most averages had reached the upside objectives of the tiny bases the short period since mid-July had allowed them to form. Further basing may indeed take place, and we would not even be surprised by the posting of new highs in some of the major averages, although we would not expect the existing breadth divergence to be erased. We cited last week the evidence for rotating downside leadership rather than the concurrent collapse in many stocks which would produce serious weakness in the averages. In other words, it seems to us, the most optimistic scenario that can be foreseen is that the market might spend some time behaving pretty much the way it has since March, at the high for which month. let it be remembered, the DJIA was about five points away from yesterday's closing figure. Meanwhile the downside potential, if the process that has been going on since last Spring is indeed a distributional top. is a wee bit on the scary side. Formulating investment policy has always been, it seems to us. a matter of weighing risk against reward and we continue, at the moment, to have the feeling that the former is somewhat greater. This Tuesday. as th-e New York Times this morning noted. an anniversary took place–the fOUrth anniversary of the 1982 market bottom–which means that we have seen four extremely rewarding years. Certainly the sort of corrective process which would set the stage for a similar period ought not to be unwelcome. nor should a policy of conserving resources for that future bull market be inappropriate at this time. AWTvf1 Dow Jones Industrials 1846.03 S & P 500 246.14 Cumulative Index (August 14, 1986) 3121. 26 ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL, INC. NO slat(lment or expression ot OpiniOn or ar'ly other matler herem contained IS or IS to be deemed to be directly or indirectly, an offer or Ihe sohcltatlor'l of an offer to buy or sell any secunly referred toor mentioned The mailer IS presented merely for the conver'llenceofthe subSCflber While we believe the sources of our information to be rehable, we In noway represent or guarantee the accuracy thmeof nor olthe statements made herein Any action to be taken by the SUbscriber should be based on hiS own investigation and information Delafield, Harvey Tabell Inc, as a Corporation and Its 011 Ice,s Of emplovees may now have or may laler take poSI\lons or trades In respect \0 any securtlles mentioned In thiS or any future Issue, and such position may be different hom any 'Ilews now OJ heleafier (lxpressed In this or any other Issue Delafield Harv(lv Tabell Inc which IS registered With the SEC as an Investment adVisor, may give advice to I\S Investment adVisory and oth(ll customers Independently 01 any statements made In thiS or In any other Issue Further information on anv secuflty mer'ltloned herein IS available on request