Tabell’s Market Letter – August 28, 1987

.. – – . – — ————- sT Lii.\IBHELn..' MLii.\RCIET LIETTIER ,—.- 600 ALEXANDER ROAD. PRINCETON, NEW JERSEY 08540 MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 9872300 August 28, 1987 I 'P!.rTtutegsdta1yors-awney2et70a0no''tJheJeerl!ln!e-wp'iehipgrhevfioolrl-Sth- We eDeRow's- lJrofJnAetsffgIn. du.sjtVriadlneAsaaeyraagneafTohlluorwsidnagy tbwL)dtnessleSdiy'ea–i-F couple of pullbacks of 20 points or so, but most of us, by now, have reached the pOInt where we can be blase about 20-point losses since. at current levels. they represent less than 1 of the Dow. 1987 has been, to say the least, an interesting year. It comprises, through yesterday. 167 tradIng days. Over that period, the average has moved ahead over 800 points from its 1986 close, which was under 1900. On no fewer than 54 of the 167 trading days, or about one day in three, we have seen newall-time highs scored in the Dow. The longest period during which the market falled to post a new high was a bit over two months, between April 7 and June 15. However, the lowest point achieved during that hiatus was a mere 7.88 below the prior high. Numerous predictions have, lately, been forthcoming suggesting the likelihood of the market's reaching the 3000 level. These strike us as being somewhat less than heroic, 3000 being barely 10 above this week's high. We salute those (we were not among them) who were mentioning 3000 at a time when it was meaningful, such as, for example, almost any time during 1986. Our own feelings regarding the market have, we hope, been made clear in recent issues. We consider the current level of most major averages as vergIng on the dangerous. The S & P 500, as we pointed out early thIS month, is selling in the vicinity of twenty times earnings. We are aware of the prospect for favorable quarter-to-quarter earmngs comparisons for the remainder of 1987 and 1988. Estimates have tended to be scaled down over the past few weeks—lBM is the most recent victim of this process—but let us, for the moment, accept the more optimistic estimates regarding earnings increases. We have noted before that, over the intermediate term, the stock market is a better predictor of earnings growth than the other way around. We think the prospect of better earnings for late 1987 and early 1988 constitutes a highly logical reason for the market's being up 800 points this year. We remain, hoever, somewhwat sceptIcal of projected 1987-88 earnings growth as a ..,.pnoredicto-OLiutule-StQck-priGs. 8stlon .' . – Along with a market that is, to say the least, fully valued on a fundamental baSIS, we continue'to see fairly strong indicatIons of Internal technical weakness. Our daily breadth index last posted a new high on March 23, with the Dow around 2300. It has recovered some two-thirds of the ground lost since its subsequent low In late May, but remaIns, at this wrlting, well away from an imminent confirmation. Indeed, a mini-divergence has now developed, since, through yesterday's close, breadth has remained below its high of August 11, scored with the DJ IA at 2680. Weekly breadth, as has been the case since 1982, acts better than that based on daily figures and could post a new peak at any time, although it is unlikely to do so this week. (There have been hypotheses as to why weekly breadth has been outperfroming the daily measure, but noone, to our knowledge, has come up with a documented cause for this phenomenon.) Having said all of the above, we remain technicians, and no such practitioner can, in our oplmon, fail to be impressed by the dynamism of the 1987 trend so far. One of the oldst adages on Wall Street IS, Don1t fight the tape., and certainly those who tried to fight it during 1987 have been knocked out of the ring and into the cheap seats. The short-term course of the market—although obviously not the very long-term course—will be determined by supply and demand rather than economic factors. The sources of potential stock-market demand have, of course, been well documented. The relabve cheapness of the U. S. market In relation to foreign ones, notably Japan, has, to be sure, probably produced a spate of foreign buying. Mutual fund cash—and, as near as can be documented, cash held by other institutions—has not, so far, been dIssipated, and the money flow Into mutual funds and other intermedlarles conbnues at a high level. Yet another source of demand appeared this week in the short interest figures, espeCIally taking into account the exceptionally high levels of short interest in the blue-chip issues that have led the advance so far. We are reminded of the old adage about the investor who confessed ,to his psychotherapist that, he could not sleep at-night for worrying about the stock market. Sell. advised the therapist, and the Investor asked How muchl1. To the sleeping point. was the answer. Investors at this time particularly. should pursue some sort of self analysis. If one finds hlmself worried about current market levels for the perfectly valid reasons discussed above, we would be loath to argue against the accumulation of some reserves. If this decision is made, however, such an investor will have to be prepared to forego losing patience if recent short-term strength continues unabated, as, indeed. it may well do. ANTHONY W. TABELL DELAFIELD, HARVEY, TAB ELL INC. AWTebh Dow Jones Industrials 0200) 2654.18 S & P 500 (1200) 329.07 CumulatIve Index (8/27/87) 4097.07 No statement or expression ot opInion or any other matter herein contained IS, or IS to be deemed to be, directly or Indirectly, an offer or the SoliCitation 01 an offer to buy Of sell any security referred tOOl men' tOned The maIler IS pfesented mefely lor the convenience of the subscriber White we betleve the sources 01 our mformatron to be reliable, we m no way represent or guarantee the accuracy thereol nor of the statements made herem Any action to be taken by the subSCfloor shoutd be based on hiS own mves\lga\lon and mformatlon Delafield, Harvey, Tabell Inc as a corporal Ion and lIs officers or employees may now have or may fater take POSitionS or trades In respect to any secufltles mentioned In thiS or any future Issue, and such POSition may be dillerenl from any views nowor heleaUer expressed In thiS or any other Issue Delafield Harvey Tabell Inc which IS registered With the SEC as an Investment adVisor, may give advice to ItS Investment advisory and otho' customers Independently of any statements made In thiS Of In any other Issue Further mformatlon on any security mentioned herem IS available on reQuest