Tabell’s Market Letter – October 04, 1991

TABELL'S MARKET LETTER 5 VAUGHN DRIVE, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 987-2300 – – – , October-4. 1991- — – –' We devoted this letter. last week. to an elaborate statistical presentation which. we assure our readers. had a purpose more serious than that of simply filling space. Its intent was to make a nt. that point being that the market action for most of 1991 so far has been. in an historical sense. highly unusllal. As we write these words. the l)ow has just fallen from the plus to the minus side of 3000 for the lOth time this year. Epochal events. such as the Russian coup. its subsequent failure and major nuclear arms reduction. have failed to move the l)ow very far away from its strange attractor. The result haa been a difference of only 9.3 between the closing low snd high of the S P 500 going back to February. We have. by now. become used to this sort of thing. We attempted, last week, to show via statistics that it is highly unrealistic to expect this kind of action to continue forever. It will become more unusual the longer It continues. The average low-to-high range for any one-year period is 26. For 18 months. It is 34 and for two years. 41. Apply these numbers to the l)ow. If the 1991 low of 2470.30 is going to prevail through 1992. an average upside expectation would be 3483. If the August high of 3055 constitutes a peak. a normal downside expectation would be 2276. Our point is that it is difficult to find a bull who will forecast anything as high as the former figure or a bear who will predict the latter one. Yet upside or downside targets much greater than either of these would be totally consistent with the normal volatility of common stocks. Now it is. of course. possible (It is always possible) that a new era haa arrived. There is much talk about the commodltlzatlon of equities. If Indexaton prevails or NYSE prices become nothing more than the arbitraged result of a trading game in Chicago, then all bets are off. Regarding new eras. however, we tend to have our doubts. It becomes necessary, then. to examine the case for extreme price changes. The bullish case, . – argued4rom -themarket-techniclans-point-ofvlew-r..aa-ablypresented-byauralleague-Ken-Tawer — in this space a couple of weeks ago. If one Is willing to hypothesize that October constituted a major cycle bottom. then Dow numbers In the 3500 area become not only possible, but Indeed probable. The bearish case, on the other hand, can be argued most strongly with fundamentals. If one examines the current level of the major averages In relation to earnings and dividends (the precise measures used can of course be the subject of endless nitpicking). equities are now Inarguably at levels historically associated with major tops. There Is, however. a bullish fundamental argument, essentially predicated on an assumed 1992 business recovery. The last major recovery from a recession was In 1983-1984. In the two years following March 1983. S P 500 earnings Increased by about one third. This would, of course, leave room for stock prices comfortably higher than those of today. Agalnst this rosy possibUlty. however. we must recsll the tendency of PIE ratios to fall as earnings rise, thus mitigating, someWhat, the effect of that rise. The bearish economic argument. of course, suggests the posslbUlty of little or no business recovery. This could easily produce the sort of crisis of confidence leading to severely lower levels. The reader will note that we have. in the above comment. been hedging, and we plead guilty as charged. We have tried to examine the probabUlty for substantively different price levels in 1992 without specifying the direction of that difference. As technicians, though. we are able to read only what the market is telling us, and it is falr to say that. in its nine-month refusal to move off of dead center, the market is telling us little or nothing. It seems. in other words, as If the market is at the moment making no assumptions whatsoever about the strength of the recovery. The market's starting to make such assumptions at some future point could cause prices to change SUbstantially. A final bullish point needs to be made. It is, after all. not price levels but the flow of funds which causes securities prices to change. We can, of course, point out. and properly. historical reiationships 'ofearnlngs and dividends to prices-If 'the stock market's now hovering in the vicinity of all-time highs is seen as a part of a money flow Into financial from other assets. it is possible that these historical relationships might Change. Japan, of course, provides an Instance of this previously having occurred in a major market. It is difficult. in summary, to suggest anything other than Vigilance as a watchword for investment policy over the Intermediate term. It does. however, seem fair to suggest that future markets wUl provide us with a bit more excitement than those of the past seven months have afforded us. ANTHONY W. TAB ELL DELAFIELD, HARVEY, TABELL INC. Dow Jones Industrials (1200) 2989.94 S l P 500 (1200) 384.39 Cumulative Index (10/3/9ll 6345.55 AWTjb No statement or expressIon of oplnron or any other matter herern contalOed IS, or IS to be deemed to be, dlrecllyor rndlreC1ly, an offer arthe soliCItatIOn of an offer to buy or sell any securrty referred to or menllOned The matter IS presented merely for the convenrence of the subscriber While we beheve the sources 01 our Information to be reliable, we In no way represent or guarantee the accuracy thereof nor of the statements made herem Any actIOn to be taken by the subSCriber should be based on hiS own investigation and information Delafield, Harvey, Tabellinc , as a corporatJon and Its officers or employees, may now have, or may later lake, poSitions or trades In respect to any securities mentioned In thiS or any future Issue, and such posl\ron may be different from any views now or hereafter expressed In thiS or any other Issue Delafield, Harvey, Tabellinc ,which IS registered With the SEC as an Investment adVisor may gIVe adVice to lIS Investment adVISOry and other customers Independently of any statements made In thiS or In any other Issue Further Information on any security mentIOned herem IS available on request