Tabell’s Market Letter – July 10, 1992

TABELL'S MARKET LETTER 5 VAUGHN DRIVE, CN 5209, PRINCETON, NEW JERSEY 085435209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 9872300 July 10, 1992 Reacting to the June employment figures released late last week, the Federal Reserve cut the discount rate to a thirtyyear low of 3 percent, which in tum signaled a cut in the Federal funds rate. This was followed shortly thereafter by cuts in – – . the prime rate to 6percent lead by New Yoljc City.moneynterbanks. Bond price.,not surprisingly,advanced. ALthe same time the Dow Jones Industrial Average continues to move ahead and continues to outperform all other broad based indicies, masking a picture we feel is clearly not representative of the overall stock market. One exception to this picture is the interestsensitive sector of the stock market, which would include the financial and utility groups. The discrepancy of the interestsensitive sector Versus the general market can best be shown by examining daily breadth of the market data. The chart below shows the behavior of daily breadth in a different manner from the traditional total issues trade breadth index, and enables us to examine this important segment of the market. CUlUATlVE 11m I'tIUtRUD STOCK BlttAIU 11100 tUU..olUYI! IfrS COIIICIM UOOC IItUDTK IIIDU The NYSE, for some SIXty five years, has recorded the advances, declines, and uncha'lged of all issues traded. More recently, breadth figures have become available for common stocks only. This new series, constructed as a breadth index (advances minus declines divided by total issues traded), is shown in the middle third of the chart above. As expected, this common stock index behaves in a similar manner to that of the traditional total issue breadth index. By subtracting common stock issues from total issues traded, we are also able to develop a preferred stock breadth index, representing approximately one-fifth of the total issues traded. This interest-sensitive index is shown above in the upper third of the chart. Both of these breadth indexes are compared to the DJIA in the lower tlurd of the chart from the August 1982, low to date. In the ten year period examined, the uruverse of preferred stocks listed on the NYSE has remained relatively constant. However, a secular increase in common stocks traded on the NYSE exists with recent additions havmg some uruque characteristics Those would mclude American Depositary Receipts (ADR), Closed-end Mutual Funds and, more recently, Preferred Equity RedemptIOn Certificates (PERC), to name a few. A clasSiCal breadth divergence can be pointed out on the chart above where the common stock breadth index spent most of the second half of 1983 declining, wlule the DJIA went on to new highs in October 1983, This divergence was followed by a correction, 15.59 percent, in the DJIA, lasting until July 1984. The preferred stock breadth index during this period, however, went to a new high, reflecting the ongoing strength in the interest-sensitIVe sector dunng the general market declinmg. By hIndsight, we also know a breadth divergence occurred prior to the October 1987 correction; i.e., breadtb reached a high in March 1987 while the DJIA went on to further highs which were not confirmed by breadth. A siDlllar divergence was registered pnor to the October 1990 low. As the preferred stock index continues to move into new high temtory, it becomes more apparent the mterest-sensitive sector of the market, representmg a major component of the stock market, has been relatively outperfonning the market. However, the common stock breadth mdex currently is still well below its high achieved last February. Were the short-term strength in the DJIA to continue to new high, a breadth divergence of over 100 days would then eXlst, a confirmation of a new high in common stock breadth becomes difficult, Dow Jones Industrials (1200) Standard & Poor's 500 (1200) Cumulative Index (7/10/92) RJSaa 3326.51 414.58 7006.00 Robert J. Simpkins, Jr. Delafield, Harvey, Tabell Inc. No statement or expression of op'nion or any other mailer herein contained IS, or IS to be deemed to be, directly or Indirectly, an oHer orthe soliCitation of an offer to buy or sell any security referred to Or mentioned The matter IS presented merely for the convenience 01 the subsCriber While we believe the sources 01 our Inlormatlon to be reliable, we In no way represent or guarantee the accuracy thereof nor of the statements made herein Any acllon to be taken by the subsCriber should be based on hiS own investigation and information Delalield, Harvey, Tabellinc as a corporation and its officers or employees, may now have, or may laler take, posItIOns or trades In respect to any secun\les mentioned In thiS or any future Issue, and such pOSition may be different from any views now ur hereafter expressed In thiS or any other Issue Delafield, Harvey, Tabellinc , which IS registered With the SEC as an Investment adVisor, may 9,ve adIJlce to rts Investment adVISOry and other customers Independenlly of any statements made In thiS or In any other Issue Further information on any secUrity mentioned herein IS available on request