Tabell’s Market Letter – September 15, 1978

TABELL'S MARKET LETTER —————1 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW VORK STOCK EXCHANGE, INC. MEMSER AMERLCAN STOCK eXCHANGE — –c Time J' September 15, 1978 common buzz phrase — the two-tier market. This description was originally coined back In the early 1970's, when Institutional growth Issues and the rest of the stock market began to wander off In opposite directions. It retained Its currency right through last year although It gradually came to be used to describe two precisely opposite phenomena. Whereas, In Its original form, It had meant that the growth stocks were moving ahead while the rest of the market did nothing, It came, In 1975-1976, to symbolize the fact that secondary issues were doing well while the major averages were In a bear market of their own. Phrasemakers love paradox and IB ve recently coined the appella- tion, one-tier market, to refer to the fact that recent strength on the part of secondaries has now tended to remove a large part of the valuation spread which normally exists between high grade and low grade Issues. In any case, with the market as a whole having moved broadly ahead since this spring, the two-tier description has generally tended to disappear from circulation. About 1976, when the popular market averages were headed south and secondary Issues, as re- presented by our Cumulative Index,were generally holding firm, we pointed out, on a number of occasions, some of the difficulties that this diverse action was causing for conventional technical analysis. We observed on the one hand, that large-capitalization stocks and the averages which reflected the behavior of those stocks were undergoing perfectly normal bear-market behavior, while secondary Issues remained in bull cycles of their own or, at worst, in consolidation phases. This presented a number of problems as the averages attempted to bottom late last year and early this year. Since many stocks had never been, in fact, in bear markets, it was unrealistic to expect them to normallywould at a major reversal. They did not, indeed, do so. . As the advance- since February has become more broad and-the -;r;ielnthe;l3O;;;-has exceeded 20- the discrepancy in price action has been less pronounced. The aftereffects of our old friend, the two-tier market, are still with us, however, and are still posing problems for the stock market technician. If we look only at the Dow or theS&P over the past few years, it becomes fairly easy to fit the market's behaVior into conventional cycle theory. We have noted in this space that the average length of stock market cycles from trough to trough In this century has been some 42 months. A major bottom in February, 1978, therefore, was reasonably consistent with that sort of experience. This was 38 months from the December, 1974, low on the Dow and 40 months from the October, 1974 low on the S&P 500. This timing produced a market cycle shorter that the average for this century but not at all out of the range of historical experience. We have, furthermore, been accustomed to use a 2'0 move as a threshold for recognition of major bull and bear markets. The advance in the Dow from Its lows of earlier this year is, as noted above, now in excess of 20. Thus, in terms of the major averages, it seems perfectly possible to place us at the present time in a rather young bull market, now only seven months old. That bull market has, furthermore, advanced just over 20, well below the average for past advances. In this sense, it would seem the outlook is bullish indeed. This, however, is where the ghost of the two-tier market returns to haunt us, for secondary stocks never underwent the sort of correction which took place in the Dow. They thus find themselves, at this stage, in an up cycle which goes all the way back to 1974, and, actually, constitutes the second -longest, .since,1-900 , .by – American Stock Exchange Index is up over 200 from its 1974 low — achieved what could be called a normal bull-market move. Thus, even as was the case a couple of years ago we find ourselves with two groups of stocks shOWing totally divergent cyclic action to analyze. It may well be, of course, that the best solution to this dllema is to Ignore it, just as the solution In 1975-1976 was to forget the Dow and buy secondaries. We think, however, the diver- gence must generally be kept in mind In any attempt to understand the somewhat un!!,recedented behavior of the stock market in the late 1970's. ….' – AWTrak Dow-Tones Industrials (1200 p.m.) S&P Composite (1200 p.m.) Cumulative Index (9/14/78) 881.24 104.54 814.24 ANTHONY W. 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