Tabell’s Market Letter – May 26, 1989

TABELL'S MARKET LETTER … I I. ,.- 600 ALEXANDER ROAD, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 987-2300 – May 26, 1989 …,-,-.–.,,– We-had –occasion4his-weektrtake-a-look -ahoary 'marktindicator -that iscp robably-;o—,….-,,-11 in many ways, out of date—the ratio of Standard & Poor's Low-Priced Stock Index to its High-Grade Stock Index. The original purpose of this indicator was to identify the existence of speculative activity, the low-priced stocks originally being conceived as those speculative issues with a public following, while the high-grade issues were taken to be those favored by conservative investors. An increase in the ratio .. therefore, tended to signify rising speculation, while a decrease suggested the opposite. The indicator can be criticized today largely on the grounds that the Low-Priced Index tends to consist of stocks that have been deservedly ignored and that more sophisticated tools for measuring secondary-stock activity (The Value Line Composite and NASDAQ Indices) are available. Nonetheless, the long sweep of the indicator—the figures are available back to 1926—makes it worth study. There has been a fair amount of consistency to the ratio's behavior. It tends to bottom out coincidentally with or shortly after major bottoms, this bottom being followed in most cases by a very sharp expansion. The rate of this rise tends to peter out fairly early on, following which the ratio itself tends to top out. These two events generally occur with substantial lead time on peaks in the major averages. There are. of course. difficulties. The lead time for the peak in the ratio is often so substantial as to make timing difflcult. There is, furthermore, the odd case of aberrant behavior. In the 1962-1966 bull market, speculative activity continued to increase merrily until a couple of months after the market had peaked, and in 1976-1978, the ratio actually moved ahead during a bear market and continued its rise throughout the subsequent bull market. A look at the current scene indicates the possibility of like strange behavior. The —iil.pIr-o.b-lTemheirse that was there has been, – a mna expansion since the between 1987 Dece bottom, hardly any ri mber, 1987 and-June, se in 1988, the at ratio at the end of which time the 6-month rate of change had reached 14.7 This is an absurdly low figure, considering that the range for this statistic over the past nine bull markets had been 25 to 54 The ratio itself has peaked out, so far at least, in September, again after showing by far the smallest rise for any bull market in the past 40 years. We have. in other words, enjoyed a bull market without. to date, any increase in what used to be considered speculative activity. This is a phenomenon totally without precedent over the past four decades. Now there are various conclusions that can be drawn from all of this. One, of course, is that a speCUlative phase will, somewhere along the line, duly emerge. This was the case in the 1962-1966 market referred to above, where the bulk of the move, from June, 1962 to May, 1965, took the Dow up some 75 in a fairly orderly fashion. The final upswing in 1965-1966 moved the DJIA hardly at all but featured a burst of activity in secondary stocks. (This is believed by many to be the usual ending for a bull market. Actually it is the exception rather than the rule.) There exists another explanation for the behavior of the Low-Priced/High-Grade ratio—that its current downturn is secular. The ratio, in July, .1983 stood at 4.65. The last time it had been this high, interestingly, was in 1926. From that time, it essentially continued to decline throughout the entire remainder of the bull market. Its increase since the 1987 lows, as noted above, has been miniscule. The reason for this may be found in the record of the Low-Priced Index itself. At the ratio's high, on July 6, 1983, that indicator was at 608.7. It did not exceed this high until 4 years later, in August, 1987, and only by a modest 16 At that point the Dow was 118 over its 1983 peak. On a short-term basis, below-average action continues. On May 17th the Low-Priced Index was just barely above its high of February. The Dow, by contrast, was over 5 above its year-earlier peak. It is conceivable, therefore, based on some 6 years of experience, that we have seen the start of a long secular downturn in relative action of secondary stocks. Only time will tell whether this pattern will continue or reverse to a more normal configuration. Dow Jones Industrials (12 00) S & P 500 (12 00) Cumulative Index (5/25/89) AWTlt 2493.77 320.66 4536.74 ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL INC. No statement or expreSSion of oplnton or any other maner herein contained IS, or IS to be deemed to be, directly or Indirectly, an offer or the soliCitation of an offer to buy Of sell any security referred to or mentioned The matter IS presented merely for the convenience of the subSCriber While we believe the sources of our Information to be rellab!e, we In no way represent or guarantee the accuracy thereof nor of the statements made herein Any aciran to be taken by the subscriber should be based on hiS own Investigation and Information Delafield, HaNey, TabeU Inc, as a corporation and lIs oHlcers or employees, may now have, or may later take, poSitions or trades In respect to any secuntles mentioned In thiS or any future Issue, and such pOSition may be dlflerent from any views now or hereafter expressed In thiS or any other Issue Delafield, Harvey, Tabelllnc, which IS registered wlth1he SEC as an mvestment adVisor, may give adVIce to ItS mvestment adVISOry and other customers Independently of any statements made In thiS or In any other Issue Further Information on any securlly menltOned herein IS available on request