Tabell’s Market Letter – January 16, 1981

TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON. NEW JERSEY 081540 DIVISION OF MEMBER NEW VORK STOCK EXCHANGE, INC MEM8Efl AMERICAN STOCK EXCHANGE January 16, 1981 IE)ast week's .isue9f t)Ji leH.e.rJweutiliedthe w.eeJ's.wild .market3l1,lclIBtions as .an,excuse for – – a general discourse on the' subject of market timing. We noted that; in'Our view, 'the ironic aspect of last week's action was that it resulted from the attempt of large numbers of investors to indulge in a market-timing exercise at a point when six years of evidence should have told them that such an effort was likely to be futile. We think that thought is worth expanding on a bit. It has always been true, and it remains so, that there exist two distinct aspects to successful asset management involving common stocks. The first of these aspects is, of course, that of forecasting the general behavior of the stock market, thereby determining what portion of total assets available for investment will be committed to equities as a class. The second aspect is security selection. This con- sists of, having chosen an appropriate asset mix, deciding how the equity portion of that asset mix shall be invested. The two disciplines cannot, of course, ever be completely separated. For example, a market forecast will often be part of the stock selection process, i. e., in determining the relative volatility of the stocks which are going to be held. There is often, however, room for argument as to which of the two disciplines is more important in the achievement of investment success. As we noted last week, there seems to have been a great deal of recent emphasis on the market- timing aspect of management. This emphasis arises, it seems to us, out of a number of traditions. The first is a simple-minded seat-of-the-pants awareness of what bear markets can do. This awareness was stimulated most recently in 1973-1974, but it can be traced back as far as 1929-1932. Even after a half-century, we suspect that the memories of that painful experience color today's investment think- ing. The second tradition which, we think, has helped stimulate the current interest in market timing has been the recent growth in quantitative analysis of the capital market process. A cornerstone of modern portfolio theory has been detailed mathematical examination of the variance of individual secu- rity prices. Such studies tend to suggest that well over half of the variation in individual stock prices tends to be explained by overall moves in the stock market, and only a minor portiQnoLthat –val'laHon by factors intrinsic to the individual stock or industry. – – – – – — – – – — – We are reminded of two aphorisms concerning the investment process. The source of one is a venerable old-time technician who said, When they back the paddy-wagon up to the door, they take out the good girls along with the bad. The second is from one of the founders of modern portfolio theory who warned, B eware the co-variances. Both were, of course, saying the same thing. At this point, a word about our own approach to the twin disciplines of market timing and security selection is in order. As our readers are aware, we expend a great deal of time and effort in the process of trying to formulate a general market forecast based upon technical factors. We are aided in this effort by an extensive computerized data bank which we use to track a large number of general market indicators, some of these conventional, and others, as far as we are aware, proprietary to us. The analysis of these indicators has been and will remain central to our stock-market thinking. We also, however, with a combination of computerized screening and human analysis, track some 2,000 individual issues on the New York and American Stock Exchanges on a weekly basis in an attempt to assess the individual price probabilities, from a technical point of view, for each one of these issues. We noted above that the disciplines of market forecasting and security selection tend to be intertwined. Quite obviously, our own feelings about the general market are going to be, at least in part, derived from that analysis of 2,000 separate stocks. It is this sort of individual stock analysis which, at the moment, prevents us from overemphasizing the various signs of general market deterioration which have been taking place on a progressive basis over the past six months. Inspection of individual patterns unquestionably shows that a number of issues are beginning to reach long-term upside objectives. Many have entered into what may well turn out to be distributional phases. The problem is that a large number of issues remain in confirmed longterm uptrends, some of these issues having recently entered into the initial stages of those uptrends. Now there is little doubt that a great many fewer stocks remain in uptrend phases than was the case, let us say, last summer. Indeed, one way of viewing the market process of the last six months has been that it has consisted of the number of attractive technical patterns being transformed from a distinct majority to a significant minority. Minority though it be, however, that number remains sig- nificant. We think, in other words, as we noted last week, that over the short term, investment success is more likely to be attained by adopting the contrary approach of emphasis on security selection and of decision-making based on individual stock patterns. This approach has, by and large, been successful for a half-dozen years, and our reading of the current technical picture is that it will continue to be so. Dow-Jones Industrials (12 00 PM) 970.31 S & P Composite (12 00 PM) 134.32 Cumulative Index (1115/81) 1034.70 ANTHONY W. TABELL DELAFIELD, HARVEY, TAB ELL AWT sla No stotement or expressIon of opinion Of any other molter hereIn conloll'led IS, or IS to be deemed 10 be, dIrectly or IndHectly, on offer or Ihe soil clIo lIon of on offer to buy or lieU any security referred 10 or mentIoned The matler IS presented merely for the convenienCE of Ihe sublicflber WhIle oNe believe Ihe sources of our Informo tlon to be rel,able, we In no way repreiienl or guarantee Ihe accuracy thereof nor at the statements mude hereIn Any actIon 10 be laken by the subSCriber should be based on hl own Investlgatlan and Informallon Janney Montgomery call, tnc, os a corporatIon, and Its offICers or employeeli, may now have, or may later toke, posItIons or trades In respect to any securllles mentIoned In Ihls or ony future Issue, and such posItIon may be dIfferent from any vIews now or hereafter expressed In thlli or any other Issue Janney Montgomery Scotl, Inc, whICh IS regIstered WIth The SEC as on Investment adVIsor, may gIve adVIce to Its Investment adVIsory and other customers IndependenTly of any statemenlii mode ,n thIS or In any other 15SUC Further informatIon on any senility mentioned herein IS avaIlable on request