Tabell’s Market Letter – December 19, 1986

TABELL'S MARKET LETTER 600 ALEXANDER ROAD, PRINCETON, NEW JERSEY 08540 , MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 987-2300 December 19, 1986 , – – . ..Readers ofthislettere,.no,,dubwretha tits, subjectma-t-t-er,is-of-ten- dictatedby …,. force of habit.' ,The'end of each year, for instance, occasions the'publication of 'three ' letters. The first of these is a review of the year just passed, the next an attempt at a forecast for the year ahead, and the third is an updated exposition of our fascination with the phenomenon of the year-end rally. The time for the first of these efforts, a review of 1986, has now arrived. Where to begin 1986 will, we suppose, go down in history as the year of the insidertrading scandals, but this is a subject better treated by the social commentator than the market technician. More in the technician's province is the full-blown maturity, during 1986, of the triple witching hour. It is, however, as yet unclear, at least to us, just what the longer term significance of this new trading pattern may be. (Due to our noon presstime, we are unable to comment on the latest edition of this event.) However, neither of these two phenomena will, in our opinion, be recognized by historians as the salient feature of 1986. That feature, we believe, will be one that this letter has been harping on for most of the past six months. It is the slightly upward-tilted trading range which has characterized the last three quarters of the past year and Which, quite possibly, may be continuing. To review it once more, that trading range, in terms of the DJIA, began on March 27th, at 1821.72. It went on to produce modest new highs, posted on April 21st at 1855.90, July 2nd at 1909.03 and September 4th at 1919.71. The interval between each of these peaks saw a decline to the mid-1700s. Provisionally, at least, it is possible to include the last high, posted at 1955.57 on December 2nd, as part of this pattern since, so far at least, that high, like the others, has produced no follow-through. I I ..-,.,T–,,h,,esiua non of a 1986 forecast is the determination of what,–p,re.cisjlly,hasb,een,, going on for the past nine moii'ths. We became disturbed, as the-pattern unfolded during the year, by the prospect that the tradng range might be a distributional top. That concern was elicited by the fact that leadership seemed to be narrowing as the year wore on. While the Dow and the S &p 500 found themselves early this month in new high ground, broader indica tors, such as the Value Line and market breadth remained closer to their lows than to their highs. Until this action improves, the possibility of a broadening top formation will continue as a cloud on the horizon. An alternative interpretation is, of course, that we are witnessing a consolidation phase in preparation for a new bull leg. This interpretation gains some credence from the fact that an important leadership shift, from consumer non-durables to the energy and industrial sectors, appears to be taking place. Such rotation is characteristic of sideways corrective processes. It is not possible to complete a review of 1986 without glancing once more at the traditional four-year cycle. It is now 52 months since the market made its last major low in August, 1982. Such cycles are, of course, measured from low to low and, with a single exception, have not exceeded 55 months in length. If the market is going to conform to this pattern, an identifiable pullback will have to occur fairly soon. We have noted in the past that it is possible to avoid this particular worry by acceptance of the hypothesis that the 15 decline between November, 1983 and July, 1984 constituted a full-scale correction and that a brand-new cycle began 2 1/2 years ago. This is, of course, plausable but, we think, somewhat less than likely. Unfortunately, the emergence at this stage of another major upward leg after a consolidation no more severe than that of 1983-1984 would have an only one historical parallel, a similarity which has been another favorite subject of this letter over the past year. That similarity would, of course, be to the market of the 1920's. It is against this rather fascinating background that we will attempt, next week, to produce a forecast of 1987 market action. AWTjt Dow Jones Industrials 1918.45 S 8. P 500 246.99 Cumulative Index 02118/86) 3145.49 ANTHONY W. TAB ELL DELAFIELD, HARVEY, TABELL INC. 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