Tabell’s Market Letter – December 08, 1989

s0Lii.\IBUEn.n.' Ia1iLii.\R IEO n.1EOOIER 600 ALEXANDER ROAD, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 987-2300 December 8, 1989 – Long.. termeaders'..of …this-letterwin '-recall–that-it-' is;–at'-least ..tosome'degree,. a .. slave – – -. atof tradition. It i8 our custom-, Year'end. to issue a series of three letters. the first R reviewing the year just past, the second (however inconvenient the timeframe might be) a forecast for the year ahead, and, finally, an updated treatise on the year-end rally. The 1989 review is not due until next week, but we would like to preface it at the moment by taking a somewhat longer term perspective. We want to examine what is, by now, certainly a minority view, but one which still exists. That view is the super-bearish case. The genesis for this view can be found in the October 19, 1987, 500-point, stock-market collapse. We contributed to that genesis ourselves, at the time, by noting that. in percentage terms, both the one-day and two-day drops completed on that date far exceeded anything that tock place during the fall of 1929. Indeed, in what seemed an almost eerie similarity, the 1929 market dropped 39 over 47 trading days, and the 1987 break produced a 36 fall in 38 trading days. Both were followed by two-day rallies, 19 in 1929, 17 in 1987. From that point, although it was hard to recognize at the time, the divergence began. By mid-November, the 1929 market had penetrated its crash low and ultimately wound up down 48, In 1987, the October 19 low held both on the initial test and a subsequent one in December. As the market began rising in early 1988, it was pointed out by a legion of pessimists that the 1929 break had, after all, been followed by a pretty good rally, lasting some six months to April. 1930 and producing a 48 advance. After six months, the DJIA in 1987 had moved ahead a bit over 20, but it was from this point that the major divergence tock place. Following April, 1930, the dreary market debacle of 1930-32 began. On October 9, 1930, the November 1929 low was broken, and, by the second anniversary of that low, it had been exceeded by 46. By contrast, ten days before the second anniversary of October 19, the Dow posted a new, all-time high, up 60 from that low. Had it duplicated the 1929 -1931 experience, it would, today, be somewhere under 1000. – – Yet, the voice of the extreme bear is still-heitrd. -It is still argu,fd that; although the current market has regained over 100 of the ground lost over a two-year period rather than only half the ground lost over a six-month period, all of the past two years constitutes a major top formation. This argument is often buttressed by reference to monetary indicators pointing in the direction of deflation and to the current, admittedly chaotic, state of the credit markets, awash in third-world debt, junk bonds, and. now, real estate loans. The present savings and loan crisis may, indeed, be taken as a metaphor for what is, admittedly, the less-than-optimal state of the American banking system at the moment. It may also, however, be used as an illustration of the differences between today and 60 years ago. Before weeping and wailing over what the S & L bail out is going to cost the taxpayer, it is worth recalling what is not happening. Any set of 1930's memorabilia includes photographs of long lines outside the doors of assorted financial institutions. By contrast, in 1989, the sorry state of the banking system is front-page material, but the bank-runs which ultimately led to a 30 monetary contractIon are absent courtesy of deposit insurance. Now this has not been achieved without cost, a fact that has, of late, become quite apparent. Indeed, steps should probably be taken to reduce that cost in the future. However, it is certainly arguable that, along with the admitted cost, there have been achieved some fairly important benefits. From a technical point of view. moreover, we think the current market scene is quite different from that of 60 years ago. As we interpret the 5000 some-odd individual stock graphs we have at our disposal, we find that most major downside objectives were reached two years ago. The most surprising part of October 1987's aftermath was the rapidity with which new bases formed. Indeed, many stocks in recent months have been reaching the upside objectives of those bases. This, in itself, should hardly be surprising following a two-year bull market, but the point is that any distributional-top formations which form at these levels will be new ones, not continuationsof.existing,pattern8 going back two or more-years. It is our thesis, in other words, that the post-1987 period can be interpreted very simply as an ordinary, normal market cycle. The 26 months that the market has spent in its 60 rise are, as we have tried to demonstrate, a perfectly normal timeframe for a bull market. Now, at some point—and we will probably be spending most of 1990 waiting for this to occur—a distributional top will be completed, and there will follow, as the night the day, a bear market. We think it likely, however, that the process will be more or less conventional and not the sort of Armageddon that the super-bear minority appears to foresee. ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL INC. Dow Jones Industrials (12 00) 2735.71 S & P 500 (1200) 349.31 Cumulative Index (1217189) 4861.24 AWTebh No statement or expression of opinion or any other matter herein contained IS, or IS to be deemed to be, directly or indirectly, an offeror the soliCitation of an offerto buy or sell any securrty referred to or mentioned The matter IS presented merely for the convenience of Ihe subscriber While we beheve the sources of our information to be rehable, we to no way represent or guarantee the accuracy thereof nor of the statements made herein Any action to be taken by the subscnber should be based on his own InvestlgallOn and mformatron Delafield, Harvey, Tabelllnc, as a corporallOn and Its oftlcers or employees, may now have, or may later take, poSitions or trades In respect to any secufltres mentioned In thiS or any luture Issue, and such poslllon may be different from any views now or hereafter expressed In thiS or any other Issue Delafield, Harvey, Tabellinc ,which IS registered With the SEC as an Investment adVisor, may give adVice to ItS Inveslment adVISOry and other customers Independently of any statements made In thiS or In any other Issue Further Informallon on any securlly mentioned herein IS available on request