Tabell’s Market Letter – March 27, 1987

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) 987-2300 March 27, 1987 The late Harold X. Schreder was, to our knowledge, the originator of the thesis that the 1—1ky -to-un d ers-tandin g -the-stock mark etlies .in,..th e .Jecognitiontha tI!!okis a!!,oin g -\ ob-ject. This is a formulation which is simple, yet profound. In a single sentenc-e, it -' -. justifies the use of technical analysis as an adjunct to the conventional fundamental approach. Fundamental analysis, it becomes apparent upon reflection, is largely concerned with levels. It is necessary only to consider the terms in which such analysis is usually couched—cheap or dear, overpriced or underpriced, etc. The technical approach, on the other hand, finds itself more concerned with trend or direction. Such an approach likens the action of the stock market to that of an airplane, recognizing the fact that it is less important to know a plane's altitude than whether it is climbing or diving. Columbus discovered the new world not by precise navigational tools, but simply by sailing west. This distinction is particularly relevant to today's stock market. As this letter has been pointing out ever since the process started, the extraordinary upside momentum generated by the rise of the past three months is characteristic of the take-off stage of a major upswing. By and large, bull-market tops do not occur On increasing upside momentum, but on the waning of that momentum. Consideration of the market's direction leaves the analyst no choice but to pronounce the outlook, for as far ahead as we can see, as calling for higher prices. It must be noted, however, that consideration of the market's current level leads to a point-of-view somewhat less optimistic. The S & P 500 closed on Thursday at 300.93. This figure is 20.2 times the approximate 14.82 earnings that average produced in 1986. The dividend for the 500 was about 8.35 which affords a yield of only 2.77 percent. Modern history has seen the S & P PIE ratio above 20 on only a few occassions. The first 1—I—-aon4e6wadsembientewe-,ennt Oc fie tober S ,P;19T38JjeanndexFt eobcrcuurarreync1r9w3n9-saaroouunndd-tt1hieeltloip1lo1'fkaet'bsu-lpleam'ka-r;kne-ttha-ned'pSruemcmeedri-nog,f-,-I–I 1946, and the final case lasted over a year between April, 1961 and April, 1962, precisely at the time the market was topping prior to the 1962 bear market. Likewise yields of less than 2.8 have, in the past, tended to precede market tops. The return of the S & P fell below this level in November-December, 1961, November, 1968, and between April, 1972 and February, 1973. What are we to make of these two contrasting outlooks' The first lesson, we think, is to avoid excuses. The writer's father, another old-time observer, was fond of remarking that stock prices, while partially dependent on earnings and dividends, are also dependent on a third factor—investor confidence. A product of such confidence is a tendency to rationalize, often quite creatively. It is now suggested, for example, that the S & P 500 is worth 20 times earnings because the Japanese stock market is even higher. A common excuse, which had prevailed up until recently, was that rising bond prices were bullish for stocks, and those whom the wire services call at the end of the day were able to explain just about every advance in the average using this explanation. It is heard less now that the S & P provides a yield approximately half that of T-Bills. Since we are technicians, we prefer to keep the level of stock prices in mind as a background factor and rely on the technical pattern as our guide to the intermediate-term outlook. This approach has historical justification. In 1961-2, the S & P PIE ratio remained above 20 for over a year, and the index advanced over 13 from the first occurrence. In addition, higher PIEs (although not as high as the present one) have often been reduced by earnings improvement. The 500 was at 19.6 times earnings in early 1959, but a subsequent earnings rise lowered that valuation. A t the moment our readers know. we assess the technical outlook as highly bullish. However. we intend continuously to remind ourselves of the rather rich prices being paid for present earnings and dividends. ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL INC. AWTbh Dow Jones Industrials (1200 pm) 2369.46 S & P 500 C12 00 pm) 300.11 Cumulative Index (3/26/87) 3816.04 No statement or expreSSion 01 opInion or any other matter herein contained IS or IS to be deemed to be directly Of Inchrectly an offer or Ihe sohcllallon of an otler 10 buy or sen any secl.Jflly referred toor mentioned The malle'ls presented merely lor the convenience 01 the subSCriber Whlfe we beheve the sources of our information 10 be reliable, we In no way represent or guarantee the aCcuracy thereof nor of the statements made herein Any aCllon 10 be laen by the subSCriber should be based on hfs own 1Twestlgallon and Inlormallon Delaflefd Harvey, Taben Inc as a corporal Ion and lis offiCers or employees, may now have, or may laler take, pOSitions or trad(!s In respect 10 any securities menlloned In thiS or any future Issue, and such position may be dltferent Irom any VI(!WS nowor heJeafler (!Kpressed In tl1ls or any other Issue Delafield, Harvey, Tabell Inc which IS registered with the SECas an Investment adVisor, may give adVice lOlls mVestmenl adVISOry and other customers Independ(!nlly of any slatemenlS made In thiS or In any other Issue Further Information on any secuflty men\loned herem IS available on request