Tabell’s Market Letter – February 10, 1967

-.'– W—a-l-sItnocn.&–C–o-. MUNICIPAL BONOS UNDERWRITERS MUTUAL FUNDS Members New York Stock Exchange and Other Principal Stock and Commodity Exchanges OFFICES TO COAST AND OVERSEAS TABEll'S MARKET lETTER February 10, 1967 The stock market rally continued to further new highs this week before running out of steam toward the week's close. An intra-day high of 871. 71 was scored in the Dow-Jones Industrial Average on Thursday before afternoon profit-taking moved the index to a lower close. On the other hand, the market was unable thereafter to make much headway on the downside as a further drop on Friday was largely erased by an advance in the latter part of the day and more stocks actually scored advances than declines. We are, at the moment, reaching a pOint where it would be natural to expect some irregularity to set in. The market remains relatively overbought on a short-term basis as, indeed, it has been ever since midJanuary. Furthermore, the Dow.has.now area which this letter has, for' some time, suggested' would provide the next crucial test. The importance of the market's reaction to this overhead supply cannot, it seems to us, be stressed too greatly. The broad 860-900 area on the Dow constitutes an area in which a good deal of stock previillsly changed hands on no less than three separate occasions in recent market history – May-June 1966, June-August 1965 and October 1964-March 1965. It is the first major test of any sort of supply which the averages have had to undergo since making their lows in October. As might be expected, a great many individual issues are also now testing similar overhead supply areas, although it must be admitted that in the cas of individual stocks the supply in a number of cases does not exist or has already been successfully breached. The successful penetration of the overhead supply ar not necessarily indicate much higher levels, although this could eventually be an e r.,.s'''\L\ what it would indi- cate' from a technical point of view, is the fact e unq lOnably e'ntered a new phase at the lows of last October and would stro sug s t these lows might not be breached for some time. Meanwhile, as the market with confllcting-storles – … ghs, the confused investor is beset . romthe'frontpages of-Friday's news- papers, William McChesney t the economy may shortly resume a rapi rate of growth. On the 0 er ha, no i s of equally impeccable reputation are pointing to the obvious weakne f c ic indicators and suggesting the likelihood of some rather serious rna r ayeconomic. We confess that at this point we do not have the slightest ide ha 67 corporate profits are going to be, nor, we suspect, does anybody else. The pic u this point is far too complex to allow for rational assessment. We find ourselves, her, relatively undisturbed, at least as yet, by the prospect of lower earnings, since, as a matter of fact, in the past, periods of declining earnings have been pretty good times to hold common stocks. For example, there have been eight cases in the past thirty years where earnings for the Dow-Jones Industrial Average declined for three consecutive quarters, or more. In six of these eight cases, the market was higher or about the same at the end of the period than it had been at the beginning. In each case, the multiple accorded the trough earnings was higher than the multiple given the peak earnings, sometimes by a considerable margin. Thus, from the third quarter of 1937 earnings declined 500/0 to the fourth quarter of 1938. Prices, however, were just about the same at the latter date as they were at the former. To take another example, earnings in 1-957-58 declined 230/0. The response of the market was to go up 340/0 over the same period. This is not at all as paradoxical as it may seem. There was, indeed, a sharp market decline in 1937-38, but it reached its low when earnings had just begun to decline. Likewise, there was a sharp drop in 1957, but the low was reached three months before earnings peaked and began to turn down. Lower earnings may well be in prospect for 1967, and if they arrive, they may well account for many things. They may account, most of all, for the market's having been down sharply in 1966. Dow-Jones Ind. 855.73 Dow-Jones Rails 227.93 ANTHONY W. TABELL WALSTON & CO. INC. AWT'amb ThIB market let.ter IB published for your convemence and informRtion Rnd Is not an offer to sell or R sohcitatlon to buy flny &eeurltles uII5cusaed The in- formation was obtained from sources we believe to be rehable, hut emDloyees may have an Interest in or purchase Rnd sell the secuntles rweeferdroedntoot guarantee herein. Its accuracy Walston & Co., Ine. and its offieers, directors or WN.801