Tabell’s Market Letter – November 01, 1991

… -.. TABELLS MARKET LETTER 5 VAUGHN DRIVE, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCtATION OF SECURtTtES DEALERS, tNC (609) 987-2300 November I, 1991 Round numbers (such as 3000 on the Dow) seem to fascinate stock-market watchers. Such interesting numbers can also exist in -other-markets, however. -For example,-.91-dayTreasury-1lills-sold-atuctiontbjs week to-Yleld 4.99 .TIus constituted the -first tlme since 1977, some fourteen years ago, that T-Bills had traded under the 5 yield level. This was not without its effect on the stock market. The Dow rose sharply on the first three days of the week, although it stopped just short of posting a new closing high, above its October 18th level of3077,15, Most averages of OTC stocks did, in fact, reach new peaks, although positing the eXistence of a correlation between the over-the-counter and treasury-bill markets is an endeavor that stretches credulity. There can be little doubt, though, that we have, at the moment, an interest-rate-driven market ThIs fact, of course, makes for some interesting paradoxes. After interest rates, the two most popular tOpICS of stock market discussion these days are the two R's. recession and recovery. When Alan Greenspan expressed. mild dissatisfaction this week over the pace of the recovery, this was taken to imply continued Fed accommodation in the money markets, whIch,according to the current conventional wisdom, would, perforce, continue to fuel ever-rising stock prices. According to this theory. the best thing that could happen to the stock market would be a full-blown depression The Fed could then comfortably bring bill rates down to around 1, and presumably the Dow would be at 10,000. This reductio ad absurdem is simply meant to suggest the fact that, at some pomt, the health of the economy—and consequent corporate earning power—needs to be taken mto account in evaluatmg the prospects for equity prices. The justification for higher, or at least firm, stock pnces rests, it seems to us, on the not illogical proposition that (1) the recesslOn IS over, (2) there Will therefore ensue the sort of earnings recovery which has characterized just about all recession bottoms since World War II, and (3) tbat recovery will be sufficient to justify not only current pnces but somewhat higher ones, a Jushfication which seems necessary given the currently full pnce for equities There has been some suggestion, especially from those who lean toward the Democratic side of the political fence (and who seem to be salivating at the prospect), that the first of these conditions may not be being met. If this is indeed true–that the recession is not over—the electoral prospects for a George Bush opponent certamly improve, but the prospects for the stock market do not. Given the assumption of a recovery now under way, we are, for now, relatively unconcerned about the probability of its assuming some kmd of unusual shape. It bas been our experience that at most recession bottoms the fear IS expressed that the subsequent uptrend-may be-unlike-all-other-uptrends-in-thelong history of-business cycles. Thisfear-generally le.ds-to-predictlon of exottc phenomena such as a double dip. Proponents of such theories generally do not cite historical examples undoubtedly because such examples are scarce to non-existent. If recovery is indeed upon us, we see no reason that it Will not assume a conventional shape and produce the sort of rise in reported profits that occurred, for example, in 1981-1982. It is, however, probably uncertainty about earnings prospects that has produced what, we have repeatedly suggested in this space, is a somewhat unusual technical shape. Between its January low and April, the DnA rallied some 21 , to a high of 3004.46. Three subsequent rallies have taken pJace–to 3035 in June, 3027 in August, and 3077 two weeks ago, These were all preceded by mild corrections, ranging in length from two to four weeks and in no case exceeding 5 We have now gone well over 200 trading days witbout a 5 correction, Uninterrupted advances of this length are rare. There have Date June 1949-June 1950 Change 41 3 No. of Days 282 indeed been only nine such advances since 1946, and they are hsted in the table at nght. As can be seen a great many have been the start of maior bull markets including those of 1949, Sept 1953-Jan 1955 Dec 1957-Aug 1959 600 593 326 410 1953, 1957, and 1970. Only one, that of 1961, has been the terminal rally of a larger bull market. The others have occurred somewhere in the middle of their parent upswings. Oct 1960-Dec 1961 Nov 1963-May 1965 298 32.0 284 370 The interesting fact about the current advance is that it is by far the shortest of any in the list. This, of course, could simply mean that it still has more time to run. However, it is July 1970-Apnl 1971 Dec 1984-Apr 1986 420 595 205 343 also suggestive of the rather flat slope of the uptrend as it has evolved so far. -, -' We suggested m tins space a month ago that this shape Nov 1988-0ct 1989 Jan 1991-0ct 1991 369 24.6 225 197 was somewhat unusual, using another set of figures to make the point Updating those figures now shows that we have remained for 38 weeks, since mid-February, withm a low for the S & p 500 (in May) of 368.57 and an August hIgh of 396.64, a range of just 7.62 . This is a record for a 38-week period, eclipsing the 7.66 range whIch prevailed between February and October 1972. Further records may be set if the S & P continues to hold WIthin these bounds. The 42-week record is 8.49 and the 44-week record 9.33 . Current symptoms are, we think in summary, those of an uncertain market, and a clearer mdication of 1992 earnings prospects will be necessary before a defInlte trend can estabhsh ltself. Dow Jones Industnals (12 noon) 3055.46 S & P 500 (12 noon) 391.06 ANTIIONY W TABELL DELAflELD,HARVEY,TABELL Cumulative Index (Oct 31, 1991) 6489.59 ' No statement or expression of opinion or any other matter herein contained IS, or IS to be deemed to be, directly or indirectly, an oHer or the soliCitation of an oHer to buy or sell any secuflty referred 10 Of menltoned The matter IS presented merely for the convenience of the subscnber While we believe Ihe sources of our information to be reliable, we In no way represent or guarantee the accuracy thereof nor of the statements made herein Any action to be laken by the subSCriber should be based on hiS own Invesllgatron and mformatlon Delaheld, HaNey, Tabell Inc , as a corporation and Its officers or employees, may now have, or may later take, POSitIOns or trades In respect 10 any secuflltes mentioned In thiS or any future Issue, and such POSition may be dlHerenl from any views now or hereafter expressed In Ihls or any other Issue Delafield, Harvey, Tabellinc . which IS registered WIth the SEC as an Investmenl adVIsor, may gIVe adVICe to ItS Investment adVISOry and other cuS10mers Independently of any statements made In thiS or In any other Issue Further mformatlon on any security mentioned herein IS avaIlable on request ,