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TABELL'S MARKET LETTER 5 VAUGHN DRIVE, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (SOg) 967-2300 January 17, 1992 After a correction which lasted all of two days and amounted to less than one percent, the stock market once more sailed into —.-newhigh territory with a 60-point-advance en Tuesday-and a-12-point follow-up cn-e'-Wednesdly.-The new-alI-time closing peak. for the DnA is now 3258.50. The first thlDg that should probably be stressed in a technical market letter is that the week's action should hardly constitute a surprise. One of the basic assertions of technical analysis is that a trend, once established, tends to remain in force and that strength begets further strength. The time to start worrying about stock prices will be when they stop attaining new peaks for a couple of weeks, not when they are demonstrating the sort of momentum now being seen. A few further observations regarding the market's behavior may be appropriate. The Dow is now up just short of 30 since October 11, 1990, a period of 320 trading days spanning some fifteen months. It is apparent that this constitutes a cycle bull market, and its magnitude and length to this point are, as we have noted in this space, perfectly normal in an historical context. There is, however. something a bit unusual about the advance's shape. After posting that October, 1990 low, the average moved ahead sluggishly, attaining a peak at 2637.15 just after Christmas. It then corrected to a low, on January 9th, 1991, at 2470.30 barely a hundred points above the October level. Then the prospects for success of Operation Desert Storm became evident. In just eight weeks, 39 trading days, the Dow had advanced over 500 points, more than 20, to a March 6th level of 2973.27. It would cross and recross that level no fewer than 6 times during the summer and fall, finally, on December 10, 1991, bottoming at 2863.82, a hundred points under the nine-month-earlier high. From that point, in five weeks or 24 trading days, it has once more moved up 13.78 to a new alHlme high. The point we are trying to make here is that we are looking at an important advance, one that has lasted so far well over a year. Yet the bulk of the upside action in this move has taken place within two short periods, eight weeks in January-March, 1991 and five weeks to date in December, 1991-January, 1992. These two upswings occupied 63 trading days, just one fifth of the total trading days in the past fifteen months. Of additional interest is the fact that this action followed a major bear market which occupied in total 61 trading days, just three months, between July and October of 1990. We have a market, in other words, that, over the past year and a half has tended to move not in continuous trends but in fits and starts. One always has to consider the possibility that, in the old phrase, this is the way things are going to be from now on. It is possible. If one believes that the stock market will invariably do that which embarrasses the greatest number of investors, It is interesting –to note that tactiCal aSset atlocatiOOliaS beCOmaliuzzword in the trendier areas of the investment management community, Markets- whIch cbange directton on a dime–and this one has done so three times in the past eighteen months–make it awfully difficult to move large amounts of money out of, say, bonds and into stocks. There can be little doubt, we think, that this sort of asset allocation has been the key factor in the increasing demand for stocks which has fueled at least the latest phase of the upswing. We have noted in this space the paradoxical relationship between the stock market and what one reads in the daily press or hears on the eleven-o'c1ock news. The media has, for the past year, trumpeted the phenomenon of recession seizing with what seemed almost like rapacious glee on each new rise in the unemployment statistics, each new report of major corporations being inundated with red ink. In the face of this, the market throughout 1991 refused to go down and now, as we enter 1992, bas once more exploded to the upside. This explosion has taken place in the face of the dismal economic news noted above and at a time when equities may be said to be, at best, fully valued. Recent press comment has tended to exhibit frustration—-wondering what, indeed, is going on in Wall Street. We cannot resist once more restating the technician's credo—-that it is supply and demand that moves stock prices. Those prices are currently moving in an upward direction because, quite simply, demand is strong. There must always exist, in the conventional wisdom, a reason why stock demand–or supply–is manifesting Itself. The favorite explanatIon, for a couple of years now, has centered around interest rates. This, again, is not surprising. We have, over the past decade, moved from a point where 9O-lay treasury bills, for example, yielded over fifteen percent to today's return of under four percent. These rates have been reflected in returns on investment media more familiar to the public such as money funds and certificates of deposit. It is logical, therefore, that the most dynamic phase of the current rally began with the 88-point advance on December 23rd, following the Fed's reduction in the rediscount rate to 3 112. An aggressive easy-money policy. it was suggested. was going to slash the available yields on those instruments which compete with common stocks for investor funds. Martin Zwelg has convincingly argued that this process could produce a cash flow into equities of as much as 90 billion. To us, this seems a perfectly sensible explanation of the obvious demand for equities that has recently emerged. —The public, it is argued, has grown accustomed to a high rate of return on cash instruments, will seek the continuation of that return by shifting funds into bonds–which, given the current yield curve, still provide a relatively generous yield or into common stocks, which have been demonstrated historically to provide a long-term return in the vicinity of 10. It can be argued, of course, that such a shift is ill-advised, that It consists of an unsophisticated public trying to maintain a high level of return by assuming an increasing amount of risk—risk the investor is not really prepared to bear and which could produce future psychological shock. The long-term return on stocks has indeed been generous. There have been fairly protracted periods in the past, however, when that return was negative. Under this confusing set of circumstances, we think, it is best to allow the market to tell its own story. Technical analysis, we are firmly convinced, will continue to help point to the way things are really going to be from now on. ANTHONY W. TABELL, CMT Dow Jones Industrials (1200) 3262.52 DELAAELD,HARVEY,TABELL Standard & Poors 500 (1200) 417.92 Cumulative Index (1116/92) 7159.14 – No statement or expression of opinion or any other matter herein contained is, or is to be deemed to be, directly or indirectly, an offer or the solicitation of an offer to buy or sell any security referred to or mentioned. The matter is presented merely for the convenience 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 of the statements made herein. Any action to be taken by the subscriber should be based on his own investigation and information. Delafield, Harvey, Tabell Inc. as a corporation and its officers or employees, may now have, or may later take, positions or trades in respect to any securities mentioned in this or any future issue, and such position may be different from any views now or hereafter expressed in this or any other issue. Delafield, Harvey, Tabell Inc., which is registered with the SEC as an investment advisor, may give advice to its investment advisory and other customers independently of any statements made in this or in any other issue. Further information on any security mentioned herein is available on request.