Tabell’s Market Letter – November 29, 1991

Tabell’s Market Letter – November 29, 1991

Tabell's Market Letter - November 29, 1991
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TABELL'S MARKET LETTER 5 VAUGHN DRIVE, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 987-2300 November 29, 1991 We remarked in this space a couple of weeks ago on the recent fashion of explaining each and every gyration of the stock ln8Jket in tenus of interest-raLes. – CUrrellt conventional-wisdom seems io-be assliming ihil\herc exjls a positive correldtion betweeli – interest rates and the stock market. We began. therefore, an examination of that hypothesis, and we continue it herewith. The first thing we noted was the obvious, but often ignored, fact of evident very-long-tenn interest-rate cycles, the most recent examples having been a bond bear market from the 1940's to 1981 and a major bull market since. We also made an atlempt to identify bull and bear bond-market swings within that conlext by applying a 10 filler 10 bond-yield dala. The figures in this letler apply the same filter to bond yields from 1950 to date using daily prices. We have been able in this fashion to identi fy eleven BOND AND STOCK MARKET BOTTOMS – 19631990 bond market botloms since 1953 along with ten tops. (lbe present Bond Bottoms Stock Bottoms Days Lead Bond Bottoms Stock Bottoms Days lead Irend, obviously, is up.) The lable at right gives the dates of those eleven bottoms. The Jun 16 1953 Aug 15 1957 Sept 141953 Oct 22 1957 63 Oct 1 1981 47 Feb 91982 Aug 12 1982 128 present fascination of equity analysts wilh bond prices may stem from the fact that it is possible to identify no fewer than ten of those bottoms with major Jan 28 1960 Ju1v 2 1970 Sept 201974 Oct251960 Mev 261970 Dec 6 1974 188 JulV 2 1984 Ju1v 24 1984 27 Oct 20 1987 Oct 19 1987 54 Mar 29 1989 Oct 11 1990 15 -, 390 bottoms in stocks. most difficult to tie (The one to a stock lo.bMar;7;;1;98;0'';'''Ap'ri;l 2;1;19;8;0;'''''3;0;';;;;;'d is, ironically, the bond market's major long term low in 1981 t when yields reached 15 .) The bond bottoms, furthermore, appear in most cases to lead the stock market! Taking the opposite point of view, seven of the nine equity-market bottoms which we identify in the period under study have becn associated, usually with a lead, with lows in bond prices. Only the collapses of 1962 and 1966 appear to have no bond-market -pnrp!rL In addition, boncd..b.ottoms w.erellSsiatedwjth important intermediatecterm.drops.in 196.L19.8S1., and-'8. . – When we try to make practical use of this information, however. we encounter a number of difficulties. 1)1e first is that the lead times tend to be short, thus making it necessary for the stock-market analyst to identify bond- market lows with precision. This is not all that easy to do. In all but two of the cases (1980 and 1982) the bond market bad mllied less than 50 basis points off its low by the time of the stock-market bottom. BOND AND STOCK MARKET TOPS – 1964 – 1990 Bond Top Oct 27 1954 DJIA 355.73 Daye Lead 681 Stock Top Jan 12 1957 DJIA 520.77 June 17 1958 47897 879 Dec 13 1961 734.91 March 27 1963 68473 724 Fob 9 1966 995.15 Feb 161971 890.06 685 Nov 1 1973 948.53 Jan 5 1977 97806 424 Sap 11 1978 907.54 46 53 45 7 -7 Even if it is conceded that bond-market action may have some value for forecasting purposes at bottoms, its usefulness at equity market tops appears to be close to nonexistent. The lable at left lists the ten bond peaks that a 10 filler identifies along with the subsequent highs in the equity marts. Here precisely the opposite problem from the one encountered with bottoms occurs. In the case of tops the lead time is unconscionably longl Up until 1980 at least, lhe bond market topped out well in excess of a year before the stock market, June 17 1980 879.27 216 April271981 1024.05 16 and in one case (1958-1961) the lead was over three years. Needless to say, in these cases Nov 301981 equities still had the bulk of their bull-market Mav 11 1983 121972 advances ahead of them at the time of the interest- 55 Nov 29 1983 1287 20 5 rate peaks. To iIIustmte this we have also shown Jan 22 1987 2145.67 149 Aug 251987 2722.42 27 in the lable the comparative levels of the Dow Jones Industrials at the bond and stock peaks and Fob 3 1988 192457 799 Julv 17 1990 2909.75 55 have listed the percentage advances in the right- hand column. – A couple of the more recent signals may be said to have had some value. Bonds turned downward on May II, 1983, six months before stocks did so and without too much ofa 'missed' advRDce in the DJIA. The January 1987 bond market top also can be credited with presaging the October 1987 collapse, although at the time of the bond market high stocks were 600 points below their ultimate August peaks. Since investor memories often tend to be short, these two recent SUCcesses may have contributed to some degree to the reputation of bond prices as a forecasting tool. In summary then the trend of the bond market may be 8 margina1Jy useful harbinger of stock market boltom.., but it is of little use at tops. This comment is presently relevant since. with the Dow standing, as of a month ago, some 30 above its year-ago levels, it is, at the moment, a top we are trying to identify, not a bottom. There are many indicators we expect to be using to look for an upcoming peak, but a correction of the bond advance will not be one of them, despite the furor it will undoubledly elicit. Dow Jones Industrials (12'00) 2893.34 Standard & Poors 500 (1200) 375.14 Cumulative Index (11127/91) 6418.11 ANTIlONY W. TABELL DELAFIELD, HARVEY, TABELL No statement or expression of opinton or any other matter herem contained IS, or IS to be deemed to be, dlreClly or Indirectly, an otler or the soliCitation of an offer to buy or sell any secUrtty referred to or mentioned The matler IS presented merely lor the convenience of the subscnber While we believe the sources of our Information to be reliable, we m no way represent or guarantee the accuracy thereof nor of the statements made herem Any aclton to be taken by the subscnber should be based on hiS own investigation and Information Delafteld, Harvey, Tabelllnc, as a corporation and Its officers or employees, may now have, or may later take, positIons Of trades In respect to any secuntles mentioned In thiS or any future Issue, and such poSition may be different from any vIews now or hereafter expressed In thiS or any other Issue DelafIeld, Harvey, Tabell Inc , whIch IS registered wrth the SEC as an Investment advisor, may give adVice to tts Investment adVISOry and other customers Independently of any statements made In thiS or In any other Issue Further InformatIon on any secunty mentioned herem IS available on request

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