Tabell’s Market Letter – October 27, 1989

Tabell’s Market Letter – October 27, 1989

Tabell's Market Letter - October 27, 1989
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' TABELL'S MARKET LETTER 600 ALEXANDER ROAD, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC 1609) 987-2300 October 27. 1989 If the now-infamous market of Friday the 13th constituted a mini-October 19. 1987 (and the Mondayrecovev, a mfnl-()ctooer ZO)7then what took place-tfifsTuesaay ()Qul!rfe termed a mini-January 23. 1987. On that day. for those who have forgotten. the Dow was up 64 points around 2 o'clock. down 50 an hour later. up 10. and finally down 44. Tuesday thus constituted a microcosm. the DJIA having been minus 85 points shortly after 10 30. down only 32 at 11 o'clock. then. after losing about half this recovery. spurting to plus territory shortly before the close. All this provided reams of media COpy. There have been few market stories over the past couple of weeks which have not contained the words program trading somewhere In the vicinity of the lead paragraph. It was easy for the press to find qUotable comments on this newly controversial issue, and most of them then tended to come down at one or the other polar extreme. The traditionalists' comments tended toward the apocalyptic, mixed with expressions of longing for a return to the good old 1950's. when the only things traded in Chicago were grown on farms. Remarks by the new era's apologists took a pious tone. with current academic buzzwords such as market liquidity and risk transfer being bandied about. A market technician is. after all. supposed to know something about markets. and. since the entire financial community has. by now, gotten into this act, we modestly add our own two cents' worth. The key word in the paragraph above is. it seems to us. market. In the perfect market we all learned about in Economics 1. lower prices tend to attract buying and diminish selling, and higher prices produce the reverse effect. Such. of course. is not always the case. as technicians implicitly discovered a century ago. when they first started talking about upside and downside breakouts. It has to be admitted. however. that a market worthy of the name must ultimately conform to the classic rules of supply and demand. To the extent that lower prices attract not buying. but. rather, additional selling, the entire market mechanism breaks down ….-,1….,..,,….,..It.. …. .crtainlyarglJable .tha.t….sucha…..condition'-OOC-Urred–t.w-G . . week8 .. ag-o;–andagam—(n-4uesday' —I… morning. An analogy can perhaps be found in the post-I929 discovery that organized bear raids could, in fact. produce lower prices. The response to this was the uptick rule for short sales. It is worth noting that this particular rule was not the result of Solomonic wisdom on the part of regulatory authorities, but. rather. evolved over nine years. A short-sale rule was first promulgated by the NYSE in 1930. The SEC was not given authority over such sales until 1934. and did not use it until 1938, when an extremely stringent rule was enacted. This rule was modified a year later to roughly its current form. The second point which needs to be made is that blaming program trading (or. correctly. index arbitrage. one form of program trading) for all eXIsting ills may be a bit too facile. It is akin to blaming the man who sees a 50 bill lying on the sidewalk for bending over to pick it up. The aforesaid is not necessarily intended to be a defense of index arbitrage. Any institUtion, if it is to exist, must be able to justify its social utility. and we find ourselves having some difficulty so justifying this particular practice. However. to the extent that a problem exists, the root cause lies in the spreads between futures and what used to be called the market. now demoted to lithe cash market. Paradoxically. it can be theorized that such spreads could be eliminated by either one of two opposing approaches. The first would involve the elimination or effective crippling of derivative markets. and the second would focus on deepening and strengthening those markets so that arbitrage index spreads would have less tendency to appear and disappear more quickly when they did. We are dealing. let it be remembered. with what may simply be a structural flaw in the market mechanism. and such flaws are often solved by purely technical changes. One recalls the trIple witching-hour. which was engendering so much breast-beating a couple of years ago. The simple basIng of settlements on opening rather than closing prices effectively eliminated the problem. In other cases, incremental experimentation and ongoing debate were necessary, as exemplified by the history of' snort.-sale rules in the 1930's. …….. ,- Such experimentation has already begun with the so-called circuit breakers. and these devices mayor may not prove effective in decreasing intra-day volatility. The solution, however, is not likely to be found in ukases promulgated by authorities far removed from the marketplace. just as it is unlikely to be solved by pious incantations suggesting that everything is fine just as it is. More pragmatism and less extremism should. it seems to us. be the order of the day. ANTHONY W. TABELL DELAFIELD. HARVEY. TABELL INC. Dow Jones Industrials 02 00) S & P 500 (1200) Cumulative Index 00/26/89) AWTebh 2594.06 336.75 4797.69 No statement or expression of opinion or any other matler herein contained IS, Of IS to be deemed to be, directly or mdlrecUy, an offer or the sollcitaboo of an offer to buy or sell any security referred to or mentioned The matter IS presented merely lor the convenience of the subSCriber While we beheve the sources of our Information to be reliable, we In no way represent or guarantee the accuracy thereof nor of the statements made herem Any aetlon to be taken by the subScriber should be based on hiS own mvestlgatlon and Information Delaheld, Harvey, Tabeiline ,as a corporation and ItS officers or employees, may now have, or may later take, positions or trades 11'1 respect to any secUrities mentIOned 11'1 thiS or any future Issue, and such posilion may be different from any views now or hereafter expressed m this or any other Issue Delafield, Harvey, Tabelllnc, which IS registered with the SEC as an mvestment adVisor, may give adVice to Its mvestmen! adVISOry and other customers mdependently of any statements made In thiS or In any other Issue Further mforma\lon on any security mentIOned herem IS available on request

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