Tabell’s Market Letter – February 20, 1987

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) 967-2300 February 20, 1987 The Dow started out the week with what has, by now, become the routine, all-time record – – – – –(m-easu.rtlin- ppi)'7i!-taeking -on–54-points -to-cloBetforthe first-'-time,–..above .Ahe-…2200 … level. After some mid-week profit taking,- the advance continued on Thursday. -Breadth -and volume were not all that they could have been. but there was little in the week's action to suggest anything more than a temporary respite in the ongoing pattern of strength. George J. W. Goodman, in one of his priceless pieces on the zany atmosphere of the late 1960s, quoted a money manager who described falling in love as being like coming off the base. It was an apt hyperbole. There is nothing quite so exciting to the technician, expecially if he is addicted to point-and-figure charts, than the prospect of a stock's moving out of a multi-year accumulation pattern. This was, indirectly, the subject of our letter last week when we suggested that one of the few noticeable signs of weakness in the current technical picture was the relatively small number of stocks just now moving off long-term base formations. That this should be the case is hardly surprising given the fact that the major averages have moved up some 180 since 1982. We did, however, cite energy issues as an example of a group of stocks that had, essentially, sat out the four-year bull market and have been just recently, moving out of long-term base formations. Selectively, another group of similar patterns may be found among the secondary and tertiary issues traded in the over-the-counter market. The hypothesis of a shift in leadership to OT C issues has at least some piausability Evidence exists, for example, that the individual investor, the normal buyer of such issues. has remained sceptical regarding the bull market to date and still has available a fair amount of investible cash. It can also be documented that the NASDAQ Industrial Index has been out of phase with the Dow for more than ten years, presenting, therefore, an alternative for those who feel that the blue-chip sector may, after a 4 li2-year advance, be fairly thoroughly exploited. 1–t—–NAS;CDA-';QEIvinddenucsetro'fitha7e1'-p,lansdetx dismalrelative first attained performance of OTC issues a high above 400 more than is 3 easy to come by. 172 years ago, in The June, 1983. At that time the Dow was under 1250. It took the OT C index three years to match that high in June of last year, at which point the DJIA was approaching 1900. Finally, in the past two weeks, the OTC average has posted a third new high, with the Dow, of course, now above the 2200 level. This lack of synchronization between the over-the-counter and listed areas can be traced all the way back to 1976. In the fall of that year, the Dow peaked at 1014 and fell steadily lower to reach 742 in February, 1978. This performance was regarded by most analysts as a major bear market, but it was, interestingly, the first such market in history during which secondary issues, instead of falling more sharply than the Dow, actually advanced. The NASDAQ index was 195.40 when the Dow made its high and was over 109 a month prior to the blue-chip low, in February, 1978. This astounding relative performance was a harbinger of the next 5 years. By April, 1981, the NASDAQ index had reached 275, a 400 improvement from its 1974 lows, vis-a-vis only a 75 rise in the Dow. Through June of 1983, as noted above, the OTC average had extended its advance above 400, behaving, in the process, at least as well as the major market indices. In June of 1983,as suggested above, the dive began in earnest. The Dow continued to a new high of 1287 in late November, by which time the NASDAQ index had barely recovered from an almost 100-point drop. As the Dow posted a relatively mild correction, to 1086 in July, 1984, the OTC indicator plumetted to 250, a low which was to be tested once more, in December, 1984, well after the Dow had started its upward path. The total decline was almost 39. Relative underperformance has continued at least through year-end 1986. At its high back in 1983, the NASDAQ index, at 408, was almost 1/3 as high as the Dow, Which was at 1241. Last year's close was 349, or 18 of the Dow, a level not seen since 1979. Only six weeks -into 1987. there exist only tentative signs of relative improvement, but they are nonetheless there. The OTC-Dow relative strength ratio has moved up some 7 1/2 recently, a rate of improvement demonstrated on only two prior occasions since the 1983 underperformance began. There are, in addition, those breakouts from multi-year bases alluded to above. We are inclined to think, in other words, that secondary issues could well be heard from before the current process is over. ANTHONY W. TABELL DELAFIELD, HARVEY, TAB ELL INC. AWTbh Dow Jones Industrials (1200) 2240.16 S & P 500 (12 00) 284.95 Cumulative Index (2/19/87) 3663.00 NO statement or expresSion 01 opinion or any other mallet herein contained IS, Or IS to be deemed to be, dlrec!!y or indirectly, an offer or the soliCitation 01 an oller to buy or sell any security referred 10 or mentioned The mailer IS presented merely lor the convemence of the subscriber While we believe the sources of our Information to be reliable, we In no way represent or guarantee the accuracy thereof nor 01 Ihe statements made herem Any action to be taf.en by the subscrrber should be based on hiS own Invesl19a1lon and Information Oela/leld, Harvey Tabell Inc, as a corpora\lon and ItS ollicers or employees may now have or may lalerlake, positions or trades In respect to any securrtles mentioned In thiS or any future Issue, and such posilion may be dll1erent Irom any views nowor hereafter expressed m thiS or any other Issue Delafield, Harvey, Tabell Inc, whiCh IS reglslered With the SEC as an Investment adVisor, may give advice to Its /Ilycslmenl ady!sory and o/her customerS mdependenlly oj any slatemenls made In Ihls or In any Olher rssue Further Inlormatlon on any securtly rnenl10ned herein IS available on requesl