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TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF' MEMBER NEW YORK STOCK EXCHANOE, INC MEMBER AMERICAN STOCK EXCH!NOE April 16. 1981 It has been the ofFrepeated opimOhof.thisletter1hat . when engaging-irttM nazardbu ari-'of stock market forecastIng, It is as important to ask the right questions as to get the right answers. It is. perhaps, worthwhile, then, at a time when ready answers to the stock market dIlemma are receIving wide publicity. to back off a bit and try to see just what sort of questions we should be asking ourselves at this stage. In such a process. it IS always best to begin WIth known facts. The first such fact is that we are (or. at worst. were three weeks ago) in a bull market. This statement is derived from the simple arithmetic of the Dow's having been at 759.13 on April 21. 1980 and at 1015.22. some 34 higher. on the 25th of last month. Thirty-four percent. while rather paltry for a bull market. even by modern-day standards. unquestionably meets historical criteria. Like most bull markets. this one started out WIth a dynamic phase. Between April 21 and September 22 of last year. it moved ahead 28 to 974.57 in just 5 months. This sort of thing is reasonably familiar to market observers. It is comparable to the 26 advance between December. 1966 and September. 1967. the 42 illcrease between July. 1970 and April. 1971. or the 52 rise from December. 1974 to July. 1975. Beginning in September. as we all know. the advance became more irregular. New hIghs above 1000 were subsequently reached, first in November. then in January, and once again three weeks ago. Yet, compared to the prior upside phase. the advance has definitely been more modest. The Standard & Poors 500. for example. posted ItS high last November and remains. at current levels. some 4 below that peak. The same is true of other broad-based indicators. There are only two possible interpretations of this sort of action. Either we find ourselves in a distributional phase preceding an important market decline. or we are in (or have just terminated) a consolidation phase preparatory to a new upswing. Having defined the question, we can now proceed to offer an answer. Based on the weight of currently available evidence. we are inclined toward the latter interpretation. There exists ample historical precedent for the argument favoring a consolidation phase. especially if one examines the history of more ,recent upswings as compared to those that took place in the 1950's and early 1960's. Following the initial advance from 669 in July-, 1970 to .950 in April. 1971. for example. -,.,– tl1eDow posted a 12 decline to August. recovered- some two-thirds of tne ground-lost. and then posted – — – another 13 drop to 798 in November. 1971. This was followed by an upward move to 1051 in January. 1973. Likewise. 1974 saw summer doldrums in which the Dow. having attained a high of 882 in July. declined to a low of 784 in October. It subsequently rose to 1014 in September. 1976. Neither of these instances is terribly unlike the present Gase. ill which the Dow declined 9 from its high of last November. posted a 10 rally into early January. dropped 7 by mid-February. and then moved tl the most recent new high. As we suggested in our letter of last week. one of the most telling arguments in favor of a consolidation phase lies in the patterns of individual stocks. By and large. these patterns fail to reveal the sort of widespread distribution whiCh one would expect to find during the buildup of a major general-market top formation. We see instead stocks just breaking out of important base formations or, more commonly, in various phases of upmoves where, in most cases, higher objectives are readable. What may well make the current market unique is the single exception to this rule. The only area in which important distributional patterns appear widely is in the energy stocks. The rather sorry short-term behavior of these Issues is, of course, a matter of historical record. It can be exemplified simply by noting the fact that the Standard & Poors Oil Composite Index reached a high of 392 back in November. It was. as of this Wednesday. around 278. a drop of almost 30. We have. in this single statistic. an almost complete explanation for the lack of progress in the averages since last fall. As of the November peak. the Oil Composite represented 24 of the S & P 500 and. related groups comprised another 2 or 3. Under these circumstances. the fact that the 500 is. at the moment. only 4 below its November high. can be construed as nothing short of remarkable. It is. indeed. a testimony to the continued technical strength of issues other than the energy laggards. We are unable to interpret this sort of action — continuing general market strength. coupled with fairly severe weakness in one area — as being a symptom of market vulnerability. This IS especially true since energy issues had, until November at least, been unquestioned market leaders. Measured on a longterm basis. these stocks have been demonstrating consistent. above-average relative strength since early 1976. The emergence of a corrective phase after five years of superior performance would appear to be nothing more than a legitimate expectation. Moreover, while some degree of further vulnerability in oil issues does exist, downside objectives in these stocks are being approached in a number of cases. If nothing else. the magnitude of the decline already posted would suggest further downside action might be limited at best. Were oil issues simply to begin moving sideways in a base formation, while the rest of the market continued its established strength. the action of the averages could be dynamic indeed. It is unarguable that the current bull market is a great deal more mature than it was at its takeoff point back last April. We think however, that, in most areas, at least, it remains in fairly robust health. and it is probably far too early to begin making pronouncements about its imminent demise. Dow-Jones Industrials S & P ComposIte CumulatIve Index (4/15/81) AWT sla 1005.58 134.58 1144.87 ANTHONY W. TABELL DELAFIELD. HARVEY. 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