Tabell’s Market Letter – September 12, 1986

———– – ————— T aIBIELL S aIil1iI R IET LIETTIER 600 ALEXANDER ROAD, PRINCETON, NEW JERSEY 08540 MEMBER NEW YORK STOCK EXCHANGE INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS. INC (609) 987-2300 September 12, 1986 Thursday's and Friday's trading was, certainly, the stuff of newspaper headlines, with the Dow Gown (fit worst; -as or thiswnlin-gy some1.5UPoinf8-i1VthEfrWb cfayS – -This-extraorClin'Qry–; …….—-.,—,,,,, program-related weakness may stimulate some thought about what sort of Pandora's Box has been opened by futures trading. However, from a conventional technical point of view. all the market did was to traverse a well-established trading range. We first drew attention to this pattern in mid-May. and were able. by mid-June, to date its beginning as March 27th. Most of our letters during that time and afterward have devoted themselves to commenting on this pattern as it has unfolded. The pattern in question, in terms of the Dow-Jones Industrial Average at least, consists of a trading range with a moderate upward bias. That range, so far, has four obvious peaks—on March 27th at 1821.72, on April 21st at 1855.90, on July 2nd at 1909.03 and, most recently, on September 4th at 1919.71. The intervening three bottoms also were each at modestly higher levels—on April 7th at 1735.51, on May 19th at 1758.18 and on August 1st at 1763.64. It is interpretation of the trading that occurred during this period that is, it seems to us, crucial for formulating a market forecast. Either this range constitutes a broad distributional top, by now implying a cycle bear market, or it is simply a broad consolidation preparing for the resumption of the upswing that stalled out in late March. If it is, indeed, a top, the implications, while they may appear somewhat horrifying on the surface, are actually rather conventional, suggesting at the moment downside objectives somewhere in the 1540-1440 range. Though declines of a 400-500 point magnitude seem horrifying on the surface, they are, in percentage terms, no more than historically normal bear-market declines of the sort the market has been able to survive routinely in the past. It is to be stressed that, while it is time to begin thinking in terms of such figures as those above, it is not yet proper to offer them up as a forecast. Before a top can be definitely identified as such, a downside breakout must take place, and, even after Thursday's experience, we are not that close to such a breakout. Furthermore. in this particular case, even determining the exact breakout 1 -I-Point.J.sdifficu1t,dJe 10 'he .thre ascending highs mentioned–Ab-olla-.ehav.e,thereforelexpendedai fair amount of space in recent issues examining the internal nature of the market since last March, trying to formulate clues 8S to whether it constitutes distribution or consohdation. There are a number of arguments in favor of the distribution interpretation, the most important being the narrowing of leadership that has progressively taken place since late spring. Our readers are already aware of the breadth divergence that began with the April high and which now. with Thursday's 1,695 declining stocks, will be even more difficult to erase. We have pointed out also the divergence in the Transportation Index and the decreasing number of new highs. Secondary stocks have now apparently joined the downside parade. WIth the AMEX and OTC indices peaking in June-July. Trading of late summer has now produced an additional factor. Significant tops in individual issues. largely absent until recently, have now begun to emerge in many of the consumer stocks which have fueled the latest two years of the bull market. Such tops had already emerged, and been noted by us among financial issues. They are now beginning to appear in the fOOd. soft-drink, drug and consumer-products areas. The emergence of distribution among these market leaders must be taken as a strong argument in favor of interpreting the general market pattern as a top also. The one thIng that could mitigate any declIne would be rotation to new leadership. and there is indeed some evidence in favor of this taking place. The patterns for energy stocks. for example, are almost entirely different than the pattern for the general market. Most such issues have broken out of—or are close to breaking out of—major bases which go back many years. Like strength has begun to appear in other commodity-related groups such as forest products and metals. It is difficult to Justify this strength on a fundamental basis. (Most analysts, ourselves included. question the prospect for higher oil prices or a resumption of inflation.) The technical strength in many such Inflation-hedge issues, however is an unquestionable fact of hfe and must. in fact, be taken into account. It is, with no downside breakout and a short-term oversold condition, still too early to offer a definitive forecast. It is not. however, too early to suggest that a shift in portfolio strategy should be taking place. That strategy should, it seems to us, involve renewed representation In some of the commodity-related Issues which have been underperforming the market over the past few years. It should also, in view of the risk of the lower price levels, suggested above, involve beginning of the assumption of a defensive posture. Further evidence, once the shock of this week's gyrations is out of the way. will, we hope, serve to clarify the nature of the trading pattern that we have observed over summer, 1986. AWTlt Dow Jones Industrials S & P 500 Cumulative Index (September 11, 1986) 1791. 20 231. 07 3042.47 ANTHONY W. TABELL DELAFIELD, HARVEY, TAB ELL INC. 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