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Mt4;iKE-l TECHhlCIANS 4SSN.

70 Pme St., Now Yc-*. SC. *. ;-at;

Market Technicians Association

JOURNAL
ISSUE 3 NOVEMBER 1978
 MARKET TECHNICIANS ASSOCIATION JOURNAL

Issue 3

November, 1978

PUBLISHED BY: MARKET TECHNICIANS ASSOCIATION

70 PINE STREET
NEW YORK, NEW YORK 10005

Direct inquiries to:

Fred R. Gruber, Editor
Market Technicians Association Journal
c/o Keystone Investment Management Co.
99 High Street
Boston, Massachusetts 02104

Copyright 1978 by LMarket Technicians Association

 MARKET TECHNICIANS ASSOCIATION JOURNAL

EDITOR:
Fred R. Gruber,C.F.A.
Keystone Investment Management Co.
99 High Street
Boston, Massachusetts 02104

ASSOCIATE EDITOR:
William DiIanni
Wellington Management Company
28 State Street
Boston, Massachusetts 02109

EDITORIAL ASSISTANT:
Ms. Cheryl Stafford, Wellington Management Co.

Thanks to Market Technicians Association members for their

part in the creation of this issue are owed to:

Walter R. Deemer
William S. Doane
William M. LeFevre
Stan Lipstadt
Ian M. T. McAvity
John R. McGinley, Jr.
Robert R. Prechter, Jr.
Alan R. Shaw
David L. Upshaw
*Arthur Merrill

* see Editor's Notes

 INDEX

MARKET TECHNICIANS ASSOCIATION JOURNAL - NOVEMBER 1978

Pages

Editor's Notes . . . . . . . . . . . . . . . . . . . 4

Letters To and Through the M T A Journal . . . . . . . 5

Indicator Analysis:

The Short-Term Trading Index

by John R. McGinley, Jr. . . . . . . . . . . . . 7 - 10

The Percentage of NYSE Issues Trading Above Their

Own lo-Week and 30-Week Moving Averages,
As Published by Investors Intelligence
by Ian M. T. McAvity . . . . . . . . . . . . .'. . 11 - 21

General:

Wav-e Personality
(Excerpt from The Elliott Wave Principle--Key to
Stock Market Profits)
by Robert R. Prechter, Jr. . . . . . . . . . . . 23 - 26

The Quadrennial Market Cycle

by William M Le Fevre . . . . . . . . . . . . . 27 - 30

How To Turn Fundamentalists Into Friends

by David L. Upshaw . . . . . . . . . . . . . . . 31 - 36

Market Timing Panel

Reprinted from The Wall Street Transcript . . . 37 - 50

Statistically Significant:

Federal Reserve Rediscount Rate: (Charted)

by Arthur A. Merrill . . . . . . . . . . . . . . 51 - 52

New Caveats in Relying on Traditional

Stock Market Statistics
by Stan West and Thomas T. Murphy . . . . . . . 53 - 59
EDITOR'S NOTES

We are into our second operational year for the Journal and

there are some new signs of continuing progress. Importantly,

our Editorial Staff has expanded, giving recognition to the

strong interest Bill DiIanni has been showing in our publication.

There is room for more help to make an even better Journal -

please show your interest.

Of note, we have for the first time directly reprinted (with

permission) articles that appeared in other publications. We

are also preparing to have other publications be able to reprint

our material. Let us know your attitude on both those avenues.

If you agree - keep on alerting us to articles worth reprinting.

Of interest, four of the contributors to this issue - Ian McAvity,

Robert Prechter, Jr., David Upshaw and Stan West - are slated

to be speakers at the Fourth Annual Market Technicians Association

Seminar, to be held at Skytop Lodge in the Pennsylvania Poconos

May 3-6, 1979. Start planning now for the opportunity to discuss

their articles at greater length then. We are also planning a

special Journal issue for the Seminar - any thoughts?

Fred R. Gruber

* A steady contributor to the MTA, Arthur Merrill, handed me

several pages of charts "on the fly" at a recent meeting and
said 'use these for filler if you want for the Journal'. That
thought presents an opportunity for any of you who have a page
of data or a chart of interest to send it along to the Journal
for possible use. Contributions don't have to be long, just
meaningful. If there is enough material offered it could form
a new section in our publication. This month Art's chart was
pertinent and got included "on the fly".
 LETTERS TO AND THROUGH THE M T A JOURNAL

INFORMATION CONTRIBUTED FOR REVIEW

Enclosed is a copy of the Encyclopedia of Stock Market Techniques

should you wish to review any of its material in the Journal. The
Encyclopedia is one of the most comprehensive anthologies of stock
market theories, ideas and practices. .......

Abe Cohen
Investors Intelligence
Editor:
Many thanks Abe. We'll place the volume in the MTA Library eventually,
but first let us hope that some of our readers/members will ask
for the table of contents and then volunteer to review an article.

COMMENT ON A JOURNAL ARTICLE EVEN BEFORE IT IS PUBLISHED

Letter to Ian McAvity,and through the Journal

. . . thanks for sending me your article on the NYSE issues above

their ten week moving averages (MA's)...1 use it myself, although
I give it a weight of one (out of four) based on 38 reading - biweekly -
over the past two years. Means 8-10 wrong calls, but still a Chi2
of between 12t and 8+ or very good. Yes, short time......
. . . . . .
I have not used the MA as until now it was not available through
Abe's (Cohen) service. MA's have a weakness - as at present: when
stocks run way ahead of their MA's in a fit of exuberance, any
down turn can lose you a lot of points before hitting the MA's.....

I think a modification which shortens the length of the MA's time as

stocks pull progressively away (from their MA's by specified amounts)
would pay dividends, e.g., if a stock was above its 10 week MA by 5%,
the next calculation would be with a 9 week MA; if 10% , an 8 week
MA; etc. As the stock/average/index reapproached the MA, the time
would again be lengthened. More computation, but more accurate/
realistic/responsive. ........

John R. McGinley, Jr.

Van Cleef, Jordan and Wood, Inc.
Editor:
Interesting idea! Has anybody done it? Now I can see why John joined
the Microcomputer Investors Association.

JOURNAL OF THE ASSOCIATION OF CHART & TECHNICAL ANALYSTS - ENGLAND

Editor's summary: MTA President Walter Deemer has written our counter-
part organization in London and we expect hereafter to swap both
our Journal and Newsletter with them, with reprint privileges to be
granted upon checking with the respective parties.

- 5-
by: John R. McGinley, Jr.; Van Cleef, Jordan and Wood, Inc.

THE SHORT-TERM TRADING INDEX

(Have You Got It Figured Right?)

First of all, what are we talking about? Variously named the

TRIN, MUX, STKS (LT)*'-after the quote-machine symbols used to display
it, the ST1 answers the burning questions, are the up stocks getting
their fair share of the volume, are the down stocks? For those
unfamiliar with its computation, the ST1 is a ratio of two ratios:
The ratio of the number of advancing stocks at any one point to the
number of declining stocks, divided by the ratio of the volume in
those advancing stocks to the volume in those declining stocks at
that same point. (I want to emphasize here the word'ratio'for reasons
which will become evident below.) A reading of 0.50 means the
average up stock is getting twice the volume at this moment as the
average down stock. Vice versa for 2.00. This computation produces
a number which is always positive and is either greater or less than
unity.
(# Stocks up)/(# Stocks down) = Short Term Trading Index
(Volume up stocks)/(Volume down stocks)
Reading and interpreting this useful number takes experience and
understanding, as with any indicator. The most important thing to
remember: It is a living, breathing series, changing every minute.
It is in no way static. In my opinion, methods of interpreting this
indicator which do not take this important fact into consideration
miss the mark and overlook the STI's greatest benefit: Its movements
can forecast market turns as much as an hour and a half in advance!
To see how this can happen, it will be instructive to dissect
what occurs when a market begins to turn, and what makes it do so.
The market opens one day with heavy selling and the averages off 10
to 15 points. Not unexpectedly, there are many more down stocks than
up, and the down volume far exceeds the up. A glance at the ST1
shws a reading of 2.54, very bearish. But is it? The answer could
be no if it read 4.54 an hour ago! For the market here to turn,
either or both of two things must change - note the word change:
The selling must abate and/or the buyers must become more aggressive,
probably both. For these two camps to reverse a downward movement
in prices, the volume in the up stocks, relative to the down, must
increase. It does not necessarily have to outstrip the volume in
the dwn stocks initially, but it must make some headway - lean
against the wind - in order to put pressure on the bears. If we
assume the bears have been applying a great deal of muscle - a not
unreasonable assumption in view of the averages being off 10 or more
points - in order to turn the tide, it stands to reason a certain
amount of buying must be brought to bear, definitely more than had
been applied earlier. Not only that, before this reverse muscle can
have effect on price, it must clean up the many sellers waiting
unfilled at current levels.
* Also called The Arms Index after Richard W. Arms, Jr. whose
original article was published in Barron's on August 7, 1967.
- 7 -
 At the same time, while this buying is being applied, while
sellers are being satisfied, before the majority of stocks muve into
the up column, the volume in those stocks already up will increase
markedly. This will be quickly seen in the change - there's that
word again - in the STI. A reading of 2.54 therefore could be a
bullish indication if it had been as much as 4.54 earlier. It is
telling us the up stocks are getting a greater share of the volume
than they had previously. Should this continue, we could have an
up day*
This exercise is a good illustration of the first important
step in utilizing the STI: Take a reading early in the day; later
in the day y0~~l.J. how where it has been. About lo:30 A.M. is a
good time, after the initial trading flurry has subsided and after
most stocks have opened. In sum, while the level of the ST1 is
important, laxxuing what its change has been in the last hour or
two is even more important.
As with many indicators, when at an extreme, the ST1 is
usually highly accurate - and timely. The up and downvolume
figures were first made available in the early '60's; Since then,
the ST.1 has closed only 71 times above 2.0. In fact, Bob Farrell***
has observed that two closes in a row over 2.00 has marked the end
of the dawnrnove in progress each of the S times it has occurred.-
since 1966.* I am not aware of similar accuracy at the other
extreme, but have seen readings on very strong days, early in the
day, of 0.20. While interesting, this discussion of closing
readings opens a Pandora's Box: Is there any value to
the closing reading each day ? We'll discuss this in greater
detail belaw.
While sharp moves and extreme readings are exceptional and have.
great predictive abilities, they are not the only methods of using
the STI. A steady series of observations can impart quite valuable
information: A ST1 holding all day at the 0.60 level is usually
very heartening, no matter what the averages are doing. A good ex-
ample is the period from August 17, 1978. @hen the Dow spent its
first day over 900 in this move) to the present,,August 29, 1978..
The pow dropped over 20 points, but there was only one day when the
ST1 closed over 1.00. In fact, there were only two hourly readings
on the other days over l-00!. The buyers were clearly more serious
about their buying than the sellers were about their selling. That
is bullish. **Obviously, the reverse would likewise be true.
* Dee 2,3 1975 Sept 26,27 1974 Aug 2S,26 1966
Aug 19,20 1973 May 19,20 1970

** Subsequently, the ST1 touched 1.0s at l.UM on 8/30 and closed

at 1.00 on 9/l/78. The sharp rise Labor Day week then ensued.
Reading much further out in time I feel to be more than this-
indicator is capable of. Once the pressures have abated-
have done their work- a new ballgame begins.
*** VP, Merrill Lynch
-8-
 Some attempt to analyze the ST1 figures in a manner similar to
the advance/decline figures; ten day moving averages, cumulative
lines and the like. Before passing jument on these efforts, a very
crucial point must be fully understood about the STI: It is a ratio,
not a percent, not an index, not an average. It changes not
arithmetically, but logarithmically. This is extremely important!
To illustrate the problem: As before, let's take the situation where
one day the average up stock is getting twice the volume of the
average daJn stock. If the situation completely reverses the next
day,logic says an average of those two days would be unity; i.e.
the first day was as much one way as the next was the other, a wash.
However, averaging the two ST1 readings (0.50 6r 2.00) gives a quite
different - and misleading - answer: 2.50 divided by two is 1.25,
not unity! Ten day moving averages computed arithmetically read far
too high. An observation of 2.0 pulls much more strongly than its
opposite reading of 0.50 in such calculations, 3.0 more than 0.333,
etc.
The correct method of doing anything with numerous ST1 readings,
is with the logs of those readings. To compute a ten-day average,
divide the sum - not the product - of the logs of all ten readings
by ten and take the anti-log (convert the log back into a number).
I have kept lo-day moving averages of the ST1 and of the up and down
volume statistics for some time. In the past few years, whenwer
the up volume, having been higher, drops below 8.SMM shares on a
ten-day basis, it has been trouble for the market; the "magic
number" for the ST1 seems to be a move over 0.93, on a ten-day basis.
What is not clear, to my own mind, is whether there is any real
carryover from one day to the next. The same question might be posed
with respect to the A/D ratio. But that ratio includes only two
number series, the ups and the downs; The ST1 is a complex
combination of four series. I feel that only when the ST1 has made
a sharp move toward the end of the day, indicating a change in sentiment,
could its implications carry over to the next day. Other than that,
each day would seem to be a separate entity and ten-day moving averages
no more than mathmatical exercizes. Anticipating this might be heretical
to some, The Journal would be receptive to opinions from those who
feel strongly. A dialog would certainly add to our understanding of
this, one of the least understood of our indicators.
For more information on the STI, see "Non-Random Moves and the
Short Term Trading Index" by Nachman Bench in The Encyclopedia of
Stock Market Techniques. See also Stock Market Logic by Norman G.
Fosback and "Buy Signal?" by Daniel Turov, Barron's, Dec. 9, 1974.

John R, McGinley, Jr.

- 9 -
 The table below details the "critical" days back to the beginning

of 1976. It is intended as a guide to the reader in finding the periods

when the ST1 could have been helpful in real time market studies.
l-3 MO. %
IO-Day lo-Day Rise/Drop
DCW/NYSI ST1 up Vol Subsequent
SELLS? (lo-Day MA ST1 attaining .93)
4/ 7/76 986i54.50 .96 8,146M - 4%
7126176 991/ss.s9 .96 6,252M -4

lo/ l/76 979/ss -70 1.00 5,080M -6

l/10/77 987156.89 -96 10,394M - 8
S/25/77 903/52,9s 1.00 S,S4SM -12
71 l/77 913154.92 -97 8,164M -13

121 2177 81WS1.68 .93 8,817M -10

10/17/78 866156.89 .9s 6,997M - 8*

BUYS? (lo-Day MA ST1 crossing under .93)

11 S/76 878148.94 .93 10,348M +16%
6110176 964/52.95 .88 6,893M +6

9/ 7176 997Els.93 .89 8,298M +3

11118176 9~so/s4.ss .89 ll,327M +6

4/12/77 937E44.41 .87 10,263M +2

111 7177 816ASO.68 .91 6,761M +4

3/l0/78 758i49.48 .86 12,459M +16

* To 10131178

- 10 -
THE TESTING OF ONE INDIfXTOR - MANUALLY

THE PERCENTAGE CIF NYSE TSSUES T-RAV'ING ABOVE THETR c)WMlO-unz&

AN21 3ikue& MUVTNG AVERAGES, As PURLISHED 8Y TNVESTORS M-EfLIGENCE.

by: Tan Mdv.Lty

Augu6-i: 24, 1978

NB: The da& be&nd a%& mdy .& publbhed evey OJ~UYLweek by
TNVESTORS I~MELLTGENCE, 2 EAST AVE, LARCHMOM, NEW YUw(, 30536
 Taking a weekly count of all NYSE Issues which are above a lo-week moving
average of their own price, and a 30-week moving average, SHOULD provide a tool
of great value to the market analyst, as an aggregate measure.
Abe Cohen, the affable editor of INVESTORS TNTELLTGENCE has been publishing
this data since late 1967, and he has permitted me to make a study of my findings
from this 560 week sample.
The two series individually, appear to oscillate like many of the more con-
ventional over-bought/over-sold indicators, which is not the subject of this paoer.
Taken in conjunction, with signals being implied by the crossing of the two series,
I have examined this ONE approach, in TWO separate lights.
My first evaluation was on the basis of "buying the 'Buy' signal" and holding
until the ensuing "sell" ; and selling short on that "sell" with the short sale being
covered on the following "buy".
The second approach took a different light, based on the assumption that one
might deduce "next week's action" on the basis of a bullish or bearish implication
drawn from "this week's" status.
TNUESTORS TNTELLTGENCE da+ :
“Evu~y Wednday at the &de 06 the ma&d,
a wmpu&zltaeeya made o(tie pWcevLtage 0642ock6 above
tieih IO-week and 30-w& mov.&g avweb.
Whentie TO-we& pac&age tie6 above tie
30-w&& pmcentage, a madat up&m may be expec.&d. Con-
vauty, when .#ze IO-week pace&age deceineb b&au tie
30-w& petrcfz&qe, a rnahkeR down&m rnq be expec&d.”
It sounds so simple and logical that my initial motivation for this paper
was the prospectof doing the definitive evaluation of an indicator which I fully
expected to prove to be one of the finest, In this respect, my findings have been
most disappointing. With Abe Cohen's approval, I have submitted this paper to the
MTA Journal with two objectives. Firstly, to share my findings; and secondly, in
the hope that such a project may inspire other technicians to prepare and make
available, their objective analyses of. other popular indicators. As a self-employed
independant market letter writer, I knew in advance that this study would not be
suitable for publication in my letter - being too long, and too technical. It has
been done as an attempted contribution to the "state of the art".

BUY/SELL 8. SELL/BUY EVALUATION

The first test was to "Buy the DJIA on the bullish crossing" and hold it to
the next “Sell” signal, or bearish crossing. These crossings being the IO-week
percentage moving through the 30.week percentage,
The logic of signals being generated by a shorter average crossing a longer
average appears relatively self-evident, for those who accept the basic premise of
trend continuity (which is really one of the basic tenets of conventional technical
analysis). It is not inconceivable, for example, that the results could have been
dramatically improved by the use of different time-length moving averages, designed
to fit established market cycle rhythms, such as those outlined by J.M. Hurst in
his book: The Pttadti Ma&c 06 S&ch Tnavlba&on Tang. I do not have the capabi Jity
of pursuing the experimentation with varying length moving averages.

- 12 -
 Listed below are the readings for a recent three month span, which
encomoasses one of the most successful "Buy/Sell" seouences, for illustration.

% ABOVE % ABOVE
VAE 1Owh Avq m DXA
Feb 22/7b 33% 37% 749
M#l 7 35 36 743
,ti 88 45 c 39 “BUY” 751*
Man 75 63 c 48 759
M&Z 22 69 c 55 758
,MLVL29 77 + 58 762
Aw 5
Apn 12 :: + 58
63 763
766
Aplr 19 54 + 74 808
Ap/r 26 86 + 81 837
82 + 829
2 lo' 81 + ii 822
83 84 “SELL” 858* 707yZ GAIN
2 :: 76 m sa 838
May 3' 75 80 841

tet Mmch S.tk, the lo-we& p~cvdage moved

above tk 30-web pencevLtoge a2 give a "Buy" 4.QnaL
TIze ub~equent "sew' !Qnat (znl42 on May 17th uhen
de lU-we& avuap ~~26 beeOur ?.he 3O-we&. B~~~LYI
tie auo ciiztu, ti VS'IA /rode 107 poti, 2~ make
tiavvypno&&z6.&&7de.

Working with data such as the above, from Oct.4th 1967 through June 28, 1978,
a sample of 560 weekly readings, there were a total of 29 "Bullish" Crossings which
were judged as "Buy" signals; and 28 completed "Sell" signals. Each of these
crossings has been catalogued in Appendix A, together with the gain or loss in the
OJIA as above, plus the number of weeks which occurred between each signal.

The 29 Bullish Crossings produced only 11 examples (38%) of a profitable "Buy"

in which the subsequent "Sell" found the DJIA at a higher level.
The 28 Bearish Crossings
yielded 13 (46%) profitable "Short Sales" of the
DJIA, in which the subsequent "Buy" occurred at a lower level than the "Short Sale".
Combining the two types of signal, we have a sample of 57 crossings, with
only 24 of them (42%) showing a profit . . . ..tuf&k w a &ockng Jma&d.on.
Within the 57 crossings, there were 11 instances of "whipsaw" in which the
next crossing came 1 or 2 weeks later. This amounts to 19% of the signals, which
seems an unacceptably high proportion, Of the 11 whipsaws, only 2 showed a profit,
which is significantly worse than the experience of the total sample.
To overcome the whipsaw problem, the BUY/SELL approach was then evaluated on
the basis of two weeks, In this test, the crossing is judged to be an "alert" with
the actual signal generated when the crossing is proven to have held the next week.
The results of this second test are listed in Appendix B, with the objective
of eliminating the whipsaws essentially achieved. This test reveals 41 crossings,
(21 bullish and 20 bearish) with a total of 21 of the 4lsignals profitable. Again,
a most unsatisfactory, and disappointing result.
- 13 -
 These results then led me to an entirely different approach, which was
based on the week to week implication of a bullish or bearish reading. In this
study, it was assumed that if the IO-week percentage is above the 30-week THIS
week, it should have either a Bullish or Bearish implication for the DJIA as
of NEXT week. . . ..and vice versa for bearish implications.
Referring back to the previous page, in that sample, the first reading
for February 22nd shows the IO-wk percentage BELOWthe 30-wk, (33% vs 37%) and
the DJIA at 749. Deducing a bearish implication for the week ahead, the NEXT
weekly reading of the DJIA is shown to be 743.....down six points. Thus, this
example shows a correct implication for the coming week.
Arbitrarily choosing a week to week change of 5 points or more in the
DJIA to be the minimum acceptable as "signiffcant"....and a move of less than
5 points to be effectively "unchanged"; Appendix C lists the weekly bullish or
bearish implications of the 10 & 30 week percentages, together with the action
of the DJIA in the NEXT week.
The rationale here was to take a firm bullish or bearish reading for the
current week, and compare the actual behaviour of the DJIA in the following one;
with inconsequential changes being filtered out unless they were 5 points or
better.
For example, the initial weeks from the previous sample are repeated here -
to illustrate the methodology of Appendix C (which was my actual worksheet).
TRENO VJ7A TN
We& 7Owk% 3Ol&% ‘IMPLIED VJlA TlENv NExl- WEEK
Feb 22 33 37 749
MaJL? 35 743 -6 +
45 :t + 751 +8 + +
kE 1: 63 48 + 759 +8 + 0
!daA 22 69 55 + ‘758 -7 + 0
762 +4

The February 22nd implication of Bearish was proven correct by the March 1
reading on the DJIA, and this is shown at right as ( - - ). At March lst, the
trend implication was still bearish, but at March 8th, the DJIA had gone up by 8
pofnts, provdng the implication wrong....shown as ( - + ). The third type of
reading occurred at March 15th and March 22nd. Both show the lo-week percentage
above the 30-week, implying bullish . . ..but in the ensuing weeks, the DJIA was
down 1 point, and-then -up 4 points. Arbitrarily judging a move of less than Sas -
being "unchanged", thesearebothshownas (+ a).
Qualifying 560 weeks of Trend Implication with the actual behaviour of the
DJIA in the following week broken down Into three categories of Up, Down or Unch-
anged; Appendix C resulted in the following totals for each of the six poss ible
patterns.
mENv VJTA TN UCCURENCESTN THE
‘IMPLIED NEn WEEK 560 WEEKSAMPLEI %I
PTmfr 123 (22.0%)
110 (19.6%) 41.6%
- + 116 (20.7%)
WRUNG
+ a 101 (18.0%) 38.7%

MARKET“UNCHANGED” ; 0 64 (11.4%)
0 46 ( 8.2%) 19.6%
- 14 -
 Rounding the aggregate nuders, I do not feel that 42% right to 39% wrong,
with no change of consequence in a further 20%, is particularly valuable.

MY CONCLUSTWS,d.Uuun $wm tie .&o did dUWu2 tes.22, &ad me 20 &eject tie.
a&icaZion 0s tie 7O-u&2 and 304&z pumxitages IN CONCERTf.u& 2ac.h 0thW. ,liu
&LuZ .tuZ 06 3&n.g Zhe 3uy SgnaL, and holding ti tie next S&t Signal (cmd V.&L
vwua do/r the SU &uugiz tie nti 34, M a shoti ha&) paved -to be utwng on 33
oj tie 57 &pa.&. Et2nhdq the Quqwtcy 06 whipaws (&a -too many) ab ou.tLked
ti Appti 3, on& -wed tie IteslLets ti 21 good 06 42 &ades.,..ot 50,'50.
The bewnd wp~ach, 06 &p..&ng c week 20 week, bu&Utz ok b&h Lrnpfi-
cation ion tie coming we& WM q.aUq wuczU,jactoq ti tie VJTA 6utuu changes
p"ov* tie .inpWnb d&t on4 47.6%, mng 38.7%, and no b.lgni&hznt change
trdmaLXng in 19.6% 06 the 560 week my&z ptid.

These are just two approaches to evaluating the potential use of these two
series of data IN CONCERT with each other, to generate signals or trend condition.

The dean of such statistical analyses, Art Merrill, has quite a different
approach, and achieves an evaluation which contradicts my findings. Art has also
reviewed this paper, with his comments being reproduced in Appendix D,
His technique, to sumTlarize it, begins with classifying all 10% or more
swings in the DJIA (as detailed in his excellent book: FTLERED WAVES), He then
subdivides each wave into quartiles, with the first and last quartiles of each
swing being the most appropriate to be bullish or bearish.
He then goes back in time, to indicate whether or not each week was a good
time to be buying or selling (in terms of the 10%.swings in the DJIA) and judges
the readings of any indicator on the percentage of correct forecasts. . ..which is to
say, how often the lo-week percentage was above the SO-week percentage during those
periods in which it was appropriate to be buying; and vice versa for selling.
Art's score for the ten year sample period showed 58.1% correct. He then
does a statistical significance test called "Chi Squared, with One Degree of Freedom"
(as outlined in his other excellent book: 3E+/AVIOUR OF PRICE.9 ON WALL STREET, as well
as many standard statistical texts), In this evaluation, the 58.1% correctness had
a "chi squared" reading of 13.9 which Art labels &fQ ~~ni6;ccutt.
In Art's proprietary BALANCETMJEX, which is composed of the 12 Indicators
which he has evaluated as the most useful, the foregoing significance rating makes
the 13.9 the 5th most significant indicator (as per his Indicator Accuracy Report
dated July 17, 1978). To quote from a letter which Art wrote to me during this
study, ‘The & ai 58% Ggkt 2o 42% wtang duesn'lt beem .impuuLve, but tie
dgti~u bwxe dwuu zhat .tb ,Lndkma dwutd be m+Loud.Q
con&duuf when ma&g bwu&nenz decL&nb.” (AAM - 08 13 7kl

As frustrating as these two conflicting conclusions are, there may well be

a valuable lesson here for the technician, In the specific analysis of the merits
of one indicator concept, it can only be enhanced by the detailed examination of an
adequate historical sample, and .Lnveb.tQa,ted ti a vtiety 06 ekt6. Simply put,
are you looking for a Buy through Sell, holding period ? or a week to week trend
implication ? or simply trying to catch the first and last quartiles of swin s of
10% or more in the DJIA ? Tha LM~.on&. 3 pw,$e ti hequ&v&i penjom &b *
tgpe 06 b&d&W. mahztion (&at I am me-a$.). ht.MeYLiee, Munan Fobback
oj MARK3 LOGIC, and ,SbGg Zwtig a{ THEZZtEf6 FORECASi. En.& tie6 a di&@ten;t b.Q&,
and ti papen. a-6,jti.a SoLvLfh. Tizehe .& a Lo2 04 morn &on mom uvnh ad Xk& k&d.
Personally, my findings lead me to the conclusion that the two series of
percentages above their own moving averages as published by Abe Cohen, very likely
- 15 -
have greater value to the technician, when used individually, as opposed to the
concept of crossing each other. From visual observation (in the absence of any
comparable examination such as the basic subject of this paper - and that because
I have yet to do it) the two appear to swing from extreme to extreme like many of
the conventional "Overbought/Oversold" oscillators.
In point of fact, INVESTORS INTELLIGENCE, the publishers of the data, put
equal emphasis on the swings o f the lo-week percentaqe by itself, as a short to
intermediate term "signal" indicator..... which I believe to be an excellent tool.

To illustrate, Appendix E plots the two series separately, from late 1967
through the end of July 1978. This chart utilizes the NYSE Composite Index, as I
personally prefer the broadest based, but capitalization-weighted Index as proxy
for the market. This chart was published as a "centrefold" (two page enlargement)
in the August 2, 1978 issue of my letter, 0EL7BERAT7ONS.

A final postscript observation that resulted from this study, might be

seized upon as a form of "proof" of the random walk theory. In categorizing the
week to week changes of the DJIA into Up, Down or Unchanged (taking moves of less
than 5 points to be 'unchanged'), tie numbetr 06 we& .&I uch categolry &urn tie
2o.W samp& 06 560 wee/~, & &err -U.&J:

up WEEKS: 226 (40%)

DOWN WEEKS: ?24 (40%)
UNCHANGED : ‘710 (20%)
TOtat 560100$

Abe Cohen said it all, on behalf of the market technicians, when he said:

'TECHN'ICTANS KNOWTHAT THE I?ANfMM WAlK EX'ISTS.....TN TWO PARTS.

A RANVOMWALK UPWARVSIS CALLED A RULL MARKET, ANV A RANlMM WALK
DOWN, 7s CALLED A BEAR MARKET!!I!!"

H-999---

- 16 -
 ,APE?iOIX ,'I"

A RECUR0 OF .Al.L CROSSXS 9F TTX !a-~& ‘EKEMAGE and 3E 30--k TRCE.VAGE.

let 7, ;?67 3UY 19 18 392

-03 i, 1963 fELL I4 50 355 9 - 37
lor 4 3UY 31 39 669 3 - 14
JUll i3 531 36 a4+ 318 :0 c 19
let 3 3UY ia+ ?a- 342 x - 24
Set ;a jai * 75 79 356 ! ,tiniosaw A :4
Aor 2 , 1969 3UY 31 28 331 2s + 25
iun ii 5ELL :s 21 30s 10 - 2s
aug 6 3w iS :!i a25 8 + 79
xav 25 ml. 27 a07 16 - i9
Jan 7, 1970 aur 43 802 6 + 5
Jan 14 SELL 32. !L 787 1 nhiusaw - 1s
Jan 21 9UY 37 29 1 WhIpsaw + 5
kr 22 SELL 11 16 E 13 - 19
Jun 3 3UY 15 - 714 \ 6 + 49
OC? 21 SELL 59 6; 760 20 +s6
oec 29 3UY 88 a7 842 10 -82
Jan 13, i971 SELL 93- 93+ 841 2 whioaaw - !
Aug 18 3uY ;: 41 z: 31 - 15
ocr 20 SELL 29 9 - 30
ceec 1 BUY sg 29 346 6 + 10
F-d i6, !972 SELL 69 76 923 11 +77
Aug 2 aw 36 2”s 941 24 - ‘A
Ott 18 iELL 25 932 11 - 3
act 2s WY 39 33 951 1 whipsaw - :9
oec 79 SZL 51 52 100s 8 + 54
Apr II, l973 3w 26 17 967 16 LS8
Ott 31 SELL 52 58 956 29 - l!
y”r ii 1974 WY 8% 9 cl01
SELL : :i 343 14 - !2
Xor 17 3UY 33 a67 1 whipsaw - 24
Aor 24 5ELL 13 2 832 1 whiosau e 35
Jun 5 aur 23 22 83u 6 + 2
Jul 2 SELL 8 3 731 4 - 39
Jul 24 ZZL 32 13 806 3 - 1s
‘lee 24 . a 9 598 22 -2QS
kc 31 3JY 616 1 WhIpsan - 18
Mar 5, 1975 SQL z ii 753 9 +!3i
act a WY zi 43 824 31 - 71
Itc i0 SELL 36 834 9 +10 .
oec 30 EL 50 ii 852 3 - 18
Feb 18, 1976 91 960 7 +I08
Jul 7 9w 67 ii ii: 20 - 31
aug 18 SELL 51 6 + 4
Sep 22 aw 66 so 1014 5 - i9
Se0 29 SELL 52 54 991 1 wnfosaw - 23
Yov 23 3UY 58 52 949 a * s2
let !O SELL 77 79 %9 3 c 20
Et -
i;tv 1977 jz?Y
3UY 43
63 52
ji 903
942 ! miosaw 17 - 39 - 27

;lUl iS 3w 57 56 918 3 - :5
;ul 27 5ELL 55 59 388 5 - 30
fOV 3 3uY u3 34 318 15 + 70
;an 11, ‘978 ZE!! 17 2s 776 9 - 12
Fe0 3 3UY J6 13 Ta3 1 - 7
sa 3 SELL 38 39 752 ! .*niusaw - 2:
‘tet 8 3w 1s Xi 3 l II

,%y :7 Sal 33 it 35a IO 1107

 APPENDIX “8”

A RECORDOF ALL CROSSINGSOFTHE IO-week PERCENTAGE and THE 30-ueek PERCENTAGE BASED ON
THE SECONDCONSECUTIVE WEEKLY READING (to filter out the one-week whipsaws).

ST3lAL
DATE Buy/Hoed SaUl Hoid GAIN UN GATN UN
!&Id i#&yh) STG+lAL
--mm :Olmt 3h.i20 PJIA Amziu seek4 --3uYS SELLS

Ccc 14, 1967 BUY :: 45 883

Feb 8, 1968 SELL 48 860 8 - 23
Xpr 11 BUY 67 ii 893 9 - 33
Jun 20 SELL 76 900 10 + 7
Apr 9, 1969 BUY 33 27 is 42 - 30
Jun 18 SELL 8 14 10 - 43
22 ‘: ZL :67 :; 809
793 16 8 - 16 + 78

Jan 28, 1970 WY 25 22 759 8 + 34

Apr 29 SELL 3 6 737 13 -22
Jun 10 BUY 6 f 43
Ott 28 SELL 4l 5: E 20 + 62
Jan 6, 1971 BUY 838 10 - 82
Jan 20 SELL ii- ii+ 850 2 rrhiosaw +lZ
Aug 25 BUY 59 z ii 31 - 58
Ott 27 _ SELL 16 9 - 72
Dee8 :E 65: z 855 6 - 19
Feb 23, 1972 9l2 11. + 57
2 2;. SELL
BUY 55
44 :: 1008
951 20 24 + 5? -39

Apr 18, 1973 BUY a :t 958 16 + 50

Nov .7 SELL 26 920 29 - 38
Jan 9, 1974 8UY 54 :t 835 9 + 85
May 1 SELL 18 854 16 + 19
Jun I2 BUY 35 27 849 6 + 5
Jul 10 SELL 3 5 762 4 - 87
-~
Jul 31 EL if 93 cc 3 (w-7) + 5
Met rZ; 1375 32 + 7
is- EL :t 38
42 iii 9 31 l 9 - 73

“,Z2P u75 mJy 2 3 (w-‘l) + 5

.sELl. iii it 7 +%
Jul 14 BUY 78 ii 1005 ‘20 - 10
Aug 25 SELL 31 971 6 -34
oec 1 BUY 68 * 56 949 14 - 22
Jan 26, 1977 SELL 70 77 959 8 + 10

Jun 22 SUY 926 21 + 33

Aug 3 SELL ?I :‘J 886 6 -40
Nov 16 %!I. 71 49 837 15 + 49
Jan 18, 1978 24 31 786 9 - 51
Har 15 BUY 63 48 759 ’ 8 + 27
~May24 SELL 76 80 838 10 + 79

+11 of 21 +10 of 20

- 18 -
__
 APPENDIX “C”

WORKSHEET: COMPARING TREND IMPLICATION FOR THE WEEK AHEAD WITH THE ACTUAL
CHANGE IN THE DJIA IN THAT ,FUTURE WEEK.

T- 1Owk Percentage ro'iative to 30wk Percentage (Above f, 3elow -)

DJ = The directional change of the DJIA in the NEXT week.
(Up 5.00 points or inore = +; Down 5.00 points or more = -; and
'unchanged' (less than 5 pts change 2ither way) = 0).

1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978

I p IN T -0J T OJ t DJ T OJ T OJ T OJ T tYJ T OJ 1I T OJ T OJ T OJ
I
i II I+ 0 I- CC I+ OIC + - 04- c + !4
- 11 I+ -I- O I- a I- CI , t - 0 + IL +I+ +I+ 1
11 -- 0 I+ -1. +I+ -I- -I+0 4 it 0 ICI I- -- - 13
41 , -- -t1+ 0 I- +I+ + I- Ii- - , + IL - -- 0 1
1 J! I- O I-- 0 I+ 0 i- of+ +I, -it-- - it +I- c 0 I- - !- s
I 61 I- 0 - -/ 0 I- +’ + 0 I- +I+ 4--r+ 0 1+ -a + ‘-c 0 1I 6
; 71 I- + I- - I+ - -- -_ -it + IC ic + i- -.'a - 7
: 0 I- 0 Ic +I+ 4-l. fl- fl- -L-i7 + I+ 0 I- -I- L -3
91 I- - I- .-1+ -I- +I- +I- +I+ f !+ - . 0 I- t
-- f '-
- 101 I- + !- - I+ I-I- - 10 0 I+ I- I- - I- + If I
/ II I- - I- + i+ i- -- 01. -I+ - I- t !- I-
IfI :- + L + i+ 0 I- + O I- + !+ 0 i- 0 I- - !- -,&ii
i 111 I- + !f It 0 I- + - +I- --I+ - - -j- ma - I+ 0 j:J
1--aI.! I* + I+ I!, -I- +I - + I- -t- i+ I- - I- 4+ 0 I4
4-l. o+ -- ax /- 4. I- 0 /* + IIS
4. - j+ - -- - 0 I+ 9 I- -i- - i- --+-t, 1’I,
IC + i+ /- -- -- - 0 I- + i- t I- - I- 4 ii- - ‘2
I& + It - -- 0 I- O-4. i- 0 I- !- - II- - ‘116
Ic - / -- -0 -- + + - I- 0 ;I + ‘I - L i- c :+ + 1 19
I+ 0 0 -I- -I- -I- ++ -- 0 !c -- - i+ j- ,,ZO
lL e- 1-b, - I- L I- AI-
7 >- n+
WI. L I- --- I- r\ I,-I ~- T1. I- /- .-z
!+ i+ -
/
i+ -- -- - -- ;- L i-
I I.i I ‘._.
I + !-
* - - ! I- O!- 0 ‘C + ,+ 4 I- - :- !- d I- - hi
10 -- - - I- -i- 0 I - ;* - !-. . II- :T;
Oi- + IA -
10 0 - + If 10 ci- --i+ 0 I+ - :- I- + I& 7
- i- - z-3.
1
I- - 14 - I+ - - 0 I- O I+ -it --;, 01, -I+ 9 I- I 26
I- i- - 14 + I- Ol- - ‘0 OlC + I+ 0 I I a7
,
j- 0 i- - ! + I- O. - - f z z i- G i-z O!CI - I4 Cl a
l- ,- - ic - -- + !+ +L, !a - 0 i+ ! ' 20
I- i- + 14 -- -- + !-I- - I+ - ;-..- -I+ + I- 01 ;i 2
I.- I I-) -If -I- ol+ I+ !- - 4 ,- 0 1 I’-
+ I+
“1 I- -& 14. + I+ -+I- + I-c c It - it - -
I- e I+ - I+ c It + It -p 1-t - I4 - I - - c, I :z
L
-'c!u? L- -'-
-- 0 I+ + IC 0 I+ I+ II- + 1-t - i- - +I- 0 1 ..-j24
I 1s! I- + i+ - I+ c I+ + I+ + it + i+ -c 1
Gl I- + I, 0 I+ 14 t+ 'I I+ 1-w c--- - ! 16
u-7, a I+ . t I* 0 I4 - ,+ - 1-t - 0
L ’ I-
kt l- + IC It 4. I+ I+ + I+ + i+ - .

- 21
j_ - .- jc + i- - -‘- 4 i+ + it 0 2 ;- ; !- -,0 1 .:2j
,‘=- _ i- - It + IL :- + it +I+ - ‘+ +!A I- I .L
44 I_ _ !- 0 IC 0 I- +i- - i !- - If I Oi- - -Li
I- .-., 41
7. -- -- I+ - ;+ fl I$- i .s
-- a I- + I+ I I- c ;-I- + !
:- s /+ + I ‘IT
---rc- e I+ 0 I- Cl’ : II yi- - ‘+.-- 0 !- + i-t
- I-
-47’. /- +i- zic
I- + it + f+ +I+ oic - ! --I 43
 YIIIILL ANALYSIS INC.

v 110, c+m. NY WI4

/ ! !
‘I
: I I OfJ 2tl 78

A I j
jMr. lan M. T. McAvity ;
Mr. Ian McAvlty
I Box 182 Adelaide St. Stn
l3aulul Goodman
‘Toronto Canada M5C 231
PO Box 182 Adalalde St. Sta
Toronto Oat Cannda M5C 2J1
Dear lan,

Dear Ian, Llul,

You’ve asked for approval. It lsrit necensaryl

Thank you for two Items: for the l upor oat ofi charta,
any way, you have It, plun my hearty “bravo - ttood work” .

end for the lntererting report on Abe Cuhon’a data.

lan - you’ve askod for commenta for Appendix D.
I don’t know what 1 can add; you’ve covered everything eo well
On the second; cheer up1 1 belleva that l omo uaofulnaes
on page 4. Perhaps the paragraph which followo wtll uufficr:
can be derlvad from the relative poaltlona of the 10 wook and
30 week percentages, if you connldor not only tho tlmo of “Des r Ian, Ciood Job1 I wae parlicularly plaaeed
I croeaover, but alro the lntorvoning wooka. Thla 18 tho toat
to see your Appendix C, l lnco lhla La one of nry favorfla
t.J that I’ve duocrlbed to the analyote hors, and ln tho Chicago
methode. ”
0 eemlnar, In each week of the tort porlod, you flrrt determine
I whetbar, by hind ulght, It was a good wook to bo buying, or a Cheo ra,
good week to be eelllng. You than acoro your Intjicator In each
week on the correctneoa of lndicatione at that time.
I ‘.
llsfng thfu test, the Indicator came out wlth quite a
ueclul score. 1 nbeaeurod it agalnat bublng and l
elllng aroao
of the ewlnyo of the Dow of more than 10%. Tljo ocop,
for 11~ tan year turt perlod: 58. 1% corraptt chl aquarod 13.9
(highly nlgnlflcant). The ratlo of 58% right to 42% wrong doesn’t
eeuu~ ir~~pruueiva, but tho eIgnfficanca l coro shows that tble
incltcator should be serlouely connidored when maklng Investment
duclolonn. 1 hope that this gives you l omo encouragement.
’ 8
lan, keep up your good work. ft’a truly outstanding.

Cheerr,

cc: A. Cuhun
 I
/
-. :
I -

/
A PAGE FOR NOTES

- 22 -
 “WAVE PERSONALITY”

i?obert 3. ?rechter, Jr.

!4errill Lynch Pierce Tenner ; Smith Inc.

The following is an except from The Zlliott Wave ?rinciple--

:*y to Stoc!c &a&Let ?rofits, by A. 3. Frost and 3. 3.. Zrechter,
Jr., available from Yew Classics Library, ?.O. 30x 262, #Chappa-
4?laI Xew York, 10514. ($21.30)

In a series of ar?zicles published in 1939 by Financial World magazine,

R. X. Elliott pointed out that the stock ma&et unfolded according to a
basic rhythm or pattern of five waves up and three waves down to form a
complete cycle of eight waves. The three waves down are referred to as
a "correction" of the preceding five waves up. The basic concept of five
waves in the direction 08 the main trend followed by three corrective waves
is shown in the figure below.

Numbered Lettered
Phase Phase

THE BASK ?ATTERN

The personality of each wave i.z tie Sliott sequence is an integral part of
the reflection of the mass _osychology it embodies. The progression of mass
emotions from ;?essimism to optimism and back again tends to follow a sitiliar
path sac:? time around, producing similiar circumstances at corresponding
3izlt.s in the rave structure. The personality of each wave *e is usually
manifest whether the wave is a Grand Supercycle or a Sub-Yinuette. These
srogerties not only forewarn the analyst about what to eqect in the next
sequence but at times can hel;, determine one's present location in the
progression of vaves, when for otkier reasons t;?e count is unclear or ooen
*a differing inte,qretations. As waves are in zhe process of unfolding,
tiere are times when sevezai different wave couhts are _serfactly admissible
under aLI. &own Zlliott rAes. it &3;- at khese junctures that a kiicwledge
of wave personality can be invaluable. If the analyst recognizes the character
of a single wave, he can often correctly interpret the complexities of the
larger pattern.

1) First waves -- As a rough estimate, about half of. first waves are part of
the "basing" process and thus tend to be heavily corrected by wave two. In
contrast to the bear market rallies within the previous decline, however, this
first wave rise is less emotional and technically more constructive. Plenty of
selling, including short selling, is in evidence as the majority has finally
become convinced that the overall trend is down. The other fifty per cent of
first waves rise from either extremely large bases formed by the previous
correction, as in 1949, from downside failures, as in 1962, or from extreme
compression as in both 1962 and 1974. From these beginnings, first waves are
impressively dynamic.

2) Second waves -- Second waves often retrace so much of wave one that most
of the profits gained up to that time are eroded away by the time it ends.
This is especially true of call option purchases, as premiums sink drastically
in the stepped-up selling during second waves. Investors have finally gotten
"one more rally to sell on" and they take advantage of it. Second waves often
produce downside non-confirmations and Dow Theory "buy spots," when low volume
and volatility indicate a dry-up of selling pressure.

3) Third waves -- Third waves are wonders to behold. They are strong and
broad, and the trend at this point is unmistakable. Increasingly favorable
fundamentals enter the picture as confidence returns. Third waves usually
generate the greatest volume and price movement and are most often the extended
wave in a series. It follows, of course, that the third wave of a third wave,
and so on, will be the mst volatile point of strength in any wave sequence.
Such points invariably produce breakouts, breakdown, runaway gaps, volume ex-
pansions, exceptional breadth, thrust, major Dow Theory trend confirmations
and large hourly, daily, weekly, monthly or yearly moves in the market, depend-
ing on the degree of the wave. Virtually all stocks participate in third waves.
Besides the personality of "B" waves, that of third waves produces the most valu-
able clues to the wave count as it unfolds.

4) Fourth waves -- Fourth waves are predictable to the extent that, by rule
of alternation, they should differ in complexity from the previous second wave
of the same degree. More often than not they are complex moves, building the
base for the final fifth wave move. Lagging stocks in an up-cycle build their
tops and begin declining during this wave, since only the strength of a third
wave was able to generate any motion in them in the first place. This initial
deterioration in the market sets the stage for non-confirmations and subtle
signs of weakness during the fifth wave.

5) Fifth waves -- Fifth waves are usually less dynamic than popular conception
holds. Most Elliott dabblers are reminded of 1928-1929 and assume that fifth
waves are "blowoff" types. However, the average fifth wave is almost always
less impressive than the third, unless it constitutes an extension. During
fifth advancing waves, optimism runs extrenrely high and secondary stocks
participate widely and in a healthy manner. As an example, the year-end rally
in 1976, a fifth wave in the DJIA, actually was led by secondary stocks. The .
wave itself was unexciting in the Dow, but it wasTever%heless an impulse wave,
as opposed to the preceding corrective wave advances in April, July, September

- 24 -
which, by contrast, had little influence on the secondary indexes or the
cumulative advance-decline line. As a monument to the optimism which that
rally produced, the advisory services polled two weeks after its conclusion
turned into the lowest percentage of "bears," 4.5%, in the history of the
recorded figures.

6) "A" waves -- During A waves of bear markets, the investment world is

generally convinced that this reaction is just a minor pullback pursuant to
the next leg of advance. The odd-lot public surges to the buy side, despite
the first really technically damaging cracks in individual stock patterns.
The A wave sets the tone for the B wave to follow. Flat A's precede upward-
ly zigzagging B's and zigzagging A's precede flat B's.

7) "B" waves -- Upward B waves are phonies. They are sucker plays, bull
traps, speculators' paradise, orgies of odd-lotter mentality. They are
often emotional, rarely technically strong, and virtually always doomed to
complete retracement by wave C. If the analyst can easily say to himself,
"There is something wrong with this market," chances are it's a B wave.
Several examples will suffice to illustrate the point.

-- The upward correction of 1930 was a B wave within the 1929-

1932 A-B-C zigzag decline. Robert Rhea describes the emotional climate
well in his opus The Story of the Averages (1934):

. ..many observers took it to be a bull market signal. I can

remember having shorted stocks early in December, 1929 after
having completed a satisfactory short position in October.
When the slow but steady advance of January and February carried
above (the previous high), I became panicky and covered at con-
siderable loss. . . . I forgot that the rally might normally be
expected to retrace possibly 66 per cent or more of the 1929
downswing. Nearly everyone was proclaiming a new bull market.
services were extremely bullish, and the upside volume was run-
ning higher than at the peak in 1929.

-- The 1961-1962 rise was a B wave in a large A-B-C irregular

correction. At the top in early 1962, stocks were selling at unheard of
price/earnings multiples that had not been seen up to that time and have
not been seen since. Cumulative breadth had peaked along with the top
of the third wave in 1959.

-- The rise into the 1968 peak was a corrective wave advance in
the DJIA. Smotionalism had gripped the public and "cheapies" were sky-
rocketing in the speculative fever, unlike the orderly and usually funda-
mentally justifiable participation of the secondaries within fifth waves.
The Dow Industrials struggled unconvincingly higher throughout the wave
and finally refused to confirm the phenomenal new highs in the secondary
indexes.

-- The rise off the 1970 low into January 1973 was another cor-
rective wave advance within the large wave IV of Cycle degree. The "one-
decision" euphoria which held the average institutional fund manager is
well documented. The area of participation again was narrow, this time .
the "nifty fifty" growth and glamour issues rather than the secondaries.
Breadth, as well as the Transportation Average, topped early, in 1972, and
- 25 -
refused to confirm the phenomenal multiples bestowed upon the favorite fifty.
Washington was inflating at full steam to sustain the illusory prosperity
during the entire advance in preparation for the election. Again, "phony"
was an apt description.

-- In 1977, the Dow Jones Transportation Average climbed to new highs

in a B wave, miserably unconfirmed by the Industrials. Airlines and truckers
were sluggish. Only the coal-carrying rails were participating as part of the
energy play. Thus breadth within the index was conspicuously lacking, confirm-
ing again that good breadth is generally a property of impulse waves, not
corrections.

As a general observation, "B" waves of Intermediate degree and lower usually

show a diminution of volume, while "B" waves of Primary degree and greater
often display volume noticeably heavier than that which accompanied the pre-
ceding bull market, usually as an indication of wide public participation.

8) "C" waves -- Declining C waves are usually devastating in their destruc-

tion. They are third waves, and have most of the properties of third waves.
It is during this decline that there is virtually no place to hide except
cash. The illusions held throughout waves A and B tend to evaporate and fear
take over. C waves are persistent and broad. 1930-1932 was a C wave. 1962
was a C wave. 1969-1970 and 1973-1974 can be classified as C waves. Advancing
C waves within upward corrections in larger bear markets are just as dynamic
and might often be mistaken for the start of a new upswing, especially since
they unfold in five waves. The October 1973 preoil embargo rally, for instance,
was a C wave in an inverse irregular correction.

These personality categories are for the most part suggestive, not inevitable
and thus not stated as rules, but as guidelines. There are always exceptions
to the guidelines but without those, market analysis would be a science, not
an art. With a thorough knowledge of wave characteristics, however, the
analyst is that much more confident of his wave count. In effect, one can
use the market action to confirm the wave count as well as use the wave count
to predict market action.

- 26 -
 THE QUADRENNIAL MARKET CYCLE

William M. Le Fevre
Granger & Company

The accompanying table, The Quadrennial Xarket Cycle Since 1900, details the
stock market's performance, as measured by the Dow Jones Industrial Average,
following the 20 U.S. Presidential elections thus far into the 20th century.

Reading from left to right, the first three columns list: the election year,
the winning candidate and his Party, and the Dow close on the Monday before
the election. It is from this point that each quadrennial market cycle begins
its three phases: 1) the post-election high, 2) the subsequent bottom, and
3) the recovery high. In the table, under each of these three phases are list-
ed: the date of occurrence of the high or low, the number of months it followed
the election (and for the latter two phases, the number of months each followed
its previous phase), the closing Dow for that date, the total point-advance/
decline, and the percent-advance/decline.

A review of the DJIA and Presidential elections thus far this century indicates
there are these three phases following nearly every election: the post-election
high, the subsequent bottom, and the recovery high. It appears that within a
relatively short time after the election, 8.1 months on average (but only a
month or so in the past three elections), the stock market tops out; followed
by a year or so of decline, 14.7 months on average; which in turn leads to a
recovery in the market that lasts a couple of years, 23.1 months on average, to
a high that usually signals the beginning of the next quadrennial market cycle.
Also shown are averages since the end of World War II, as we think them to be
more meaningful than results earlier in this century.

As for the causes of this repetitive quadrennial market cycle, it appears that
investor psychology and political patterns seem to be in synchronization much of
the time. Phase one; the post-election high, certainly in the past three elec-
tions, is reached fairly soon after the votes are counted as investor euphoria
becomes tempered a bit by: 1) the selling of stocks by some disappointed invest-
ors who voted for the loser, and 2) the general realization by all that campaign
promises are kept only slightly less frequently than New Year's resolutions are.

Phase two, the subsequent bottom, comes at about the time the new President's
popularity reaches its nadir. This disenchantment, both investor and voter,
begins with the "end of the honeymoon" all Presidents meet sooner or later in
their terms. The depth of the President's popularity quotient and the subsequent
bottom often coincide, usually with a minimum of publicity both in Wall Street
and Washington -- sort of, as T.S. Eliot put it, "not with a bang but with a
whimper."

Phase three, the recovery high, and the longest in time of the three phases of
the quadrennial market cycle, builds as the President's popularity improves and
his programs gain greater acceptance. Just as phase two, the subsequent bottom,
is triggered by the President's inability to get his programs across, phase
three gains momentum as the President learns the art of compromise is what poli-
tics is really all about. It is in the President's best interest that the econ-
omy be reasonably positive as the next general election nears, for voters with
"empty bellies" rarely vote for the incumbent. The trick successful Presidents,

- 27 -
those that get re-elected, must learn is how to accomplish a "full-belly feeling"
in the lower end of the economic scale, while not appearing to be too socialistic
to the upper income crowd, who by and large are more conservative in both their
voting patterns and investments.

Thus far into the Carter Administration the Quadrennial Market has run pretty
much true to form. Phase one, the post-election high, 1004.65 on December 31,
1976, came 1.9 months after the election and 4.0% higher than the DJIA close the
day before the election. As can be seen in the table, this compares favorably
in time and percent gain with the elections of 1968 and 1972. The phase one
postwar averages of 7.8 months and +13.6%, being lower than the overall 20th
century averages of 8.1 months and +22.3%, suggest that investor psychology re-
garding investments following a Presidential election has become somewhat cynical
of late in that no matter what Party, the stock market's rally following an elec-
tion is now getting shorter in time and lower in gain than was the case earlier
in this century.

The second phase of the QMC under Jimmy Carter, the subsequent bottom, occurred
on February 28, 1978, when the Dow closed at 742.12. Its time frame, 14.0 months
after the post-election high, compares favorably with the full 20th century aver-
age number of months following post-election high, 14.7 months, but it was a bit
later than the postwar average of 10.9 months. Its depth of decline, 26.1% to a
subsequent bottom was not as deep as the 76-year average, -33.5%, but, it none-
theless did compare closely to the postwar average decline to a subsequent bottom
of -25.7%.

Which brings us to the third phase of the QMC, the recovery high. It is our
belief that this recovery phase began with the 742.12 low close on last February
28th. Through the Dow's recent high close of 907.74 on September 8th, the recov-
ery phase has to-date amounted to 165.62 points or 22.3%. As for when this recov-
ery phase might ultimately top out, and where, perhaps some range might be estab-
lished by looking at past third phases of the QMC.

The long-term average of the number of months required to reach a recovery high
is 23.1 months after the subsequent low is reached. The postwar average is a
bit longer, 24.1 months. So if this recovery is an “average” one in length, then
the next important Dow top should be reached somewhere between February 3 and
Marhc 3, 1980. Additional confirmation of the possibility of a late-winter 1980
top can be found in the average of the nine Democrat cycles thus far in the 20th
century, 23.0 months, or in this case, January 31, 1980. The extremes in these
nine Democrat cycle time frames are: on the near end, 7.4 months (or October 12,
1978 in this cycle), experienced in FDR's 2nd term, and at the far end, 42.6
months (or August 18, 1981 in this cycle), as was the case in Harry Truman's
upset of Tom Dewey.

That was the "when". Now for the "where". The long-term QMC recovery high per-
centage average gain is +81.3% (or 1345.46 in this case). The postwar figure is
+60.9% (1194.07). The average percent gain of the nine Democrat cycles in this
century is +63.7% (1214.85) , with the extremes being +127.3% (in FDR's 1st term)
or 1686.84 based on the February close of 742.12, and +18.4% (in FDR's 4th term)
or 878.67 -- a figure already surpassed in this recovery phase.

Thus, taking all these projected possibilities, which range from 878.67 to i686.84
on the Dow, and from October 12, 1978 to August 18, 1981 in time, we would narrow

- 28 -
things a bit and project a high on the Dow somewhere between the postwar aver-
age percentage gain of +60.9% or 1194.07 and the long-term average gain of
+81.3% or 1345.46, or an average of these two projected Dews, 1269.77 which is
not much greater than the nine Democrat average recovery high percentage gains
in this century of +63.7% or 1114.85. As for when this recovery might top out,
we think some time in 1980, _Drobably in the late-spring or early summer, in
conjunction with the state grimaries and major party political conventions,
which can be counted on to produce some stock market uncertainty, and therefore
a pause, if not a significant top.

October 2, 1978

- 29 -
 QUADRENNIAL MARKET CYCLE
1000-1878

rRo* tyr PUcr,W suz

WIA
Cllu*
b&Y The Subre- lu1rl
t1acttu ndoca lthc- yurmr DJIA Point P*XCSXt

-- vrrr Yhllar a El*ctlsu Date JkiL--

‘LO&l OO‘C”. CIOAW Pacovrry n*cow~

l9oD YllllU lkl(lnley I 60.81 L/17/01 a.6 78.26 + 17.39 +28.6x Ill 9/03 36.2 27.7 42. I5 - 36.11 -46. Ii 1/19/06 62.5 26.3 lD3.00 + 60.85 +144.4x

IYM 1-r* Roorcvalt II 66.21 l/l9/oi 14.5 103.00 t 36.79 t55.61 II/IS/O7 36.4 21.9 53. M - 50.00 -48.52 ll/l9/DY 60.5 24.1 IDO. 53 t 47.53 t 89.73

19w YLlltu llomerd Irft a a2.90 I I/ l9/09 12.5 100.53 l 17.63 +21.3x 9/25/ll 34.6 22.1 72.Y4 - 27.59 -27.41 g/30/12 46.9 12.3 94.15 i 21.21 t 29.11

I912 uwdrw ~llslnl II 90.29 II! L/l2 0.1 91.94 + I.65 t l.ax 7/3D/l4 20.9 20.8 11.42 - 20.52 -22.31 ll/21/16 48.5 27.6 110. I5 t 3a.73 t 54.2x

I916 Wodrou Yllson 0 lD7.2I III2III6 0.5 llD.lS t 2.94 + 2.71 12/19/17 13.4 12.9 65.95 - 44.20 -40. IX II/, 3/19 36.0 22.6 119.62 + 53.67 + al.411
1920 Uwrcn 6. Nerdleg a a5.4a - -- - -- -_ --__ - - - - __ - _- - _ _ __ __ a/24/21* 9.1 21.7 63.90 - 55.72 -46.6x 3/20/23 28.6 111.9 105.38 t 41.48 t 64.91

I924 Celvln Coolidge II 103.89 21 I I/26 15.2 162.31 t 58.42 t56.21 3/30/26 Id.9 I.7 135.20 - 27.11 -16.7x 91 3129 58.0 41.1 381.17 t245.97 1181.91
l92a llerbert C. Hoover a 257.58 91 3129 10.0 3a1.17 1123.59 t4a.01 71 a/32 44.1 34.1 41.22 -339.95 -a9.2x 2/ 5/34 63.0 18.9 110.74 t 69.52 1168.71.

I932 frmklln D. Rmrcvrlt 0 64.58 4/20/u 17.6 11X.55 t (I.97 465.M 7/26/34 20.6 3.0 85.51 - 21.04 -19.71 3/lO/37 52.1 31.5 194.40 +lOY.&lY +127.3x
l9J6 Crrnklln 0. Roarauelt D 116.67 3/10/37 4.2 194.40 + 17.73 +lo.Dx 3/31/3a 16.9 12.7 98.95 - 95.45 -49. Ix ll/l2/3a 24.3 7.4 158.41 + 59.46 t 60. lx

1940 frmklin 0. lluorcvclt 0 135.21 II/ g/40 0.1 ma.12 + 2.91 t 2.2x 4/28/42 17.8’ 17.7 92.92 - 45.20 -32.7x 7/14/43 32.2 II.4 145.82 t 52.90 + 56.91
I914 frrnklln a. Roosevelt 0 147.92 5/29/46 la. a 212.50 t 64.58 143.7x IO/ 9146 23.0 5.8 163. I2 - 49.38 -23.21 5/15/4a 43.3 20.3 193. I6 + 30.04 t la.42
1948 Harry 5 lrurn 0 Ia9.36 ----_--- -m-e ------ ----- ----- 61 l3/49*’ 7.4 Il.9 161.60 - 31.56 -16.31 l/ 5/53 50.0 42.6 293.79 tl32. I9 t al.81
I952 I*rlyht 0. Etsenhwer I 210.23 I/ 5/53 2.0 293.79 + 23.56 + 8.71 Y/14/53 10.3 a.3 255.49 - 3a.30 -13.0x 4/ 6156 41.0 30.7 521.05 t265.56 t103.91
lY56 LMlght 0. Elrenhwer ll 495.37 7/ l2/57 a.3 520.77 t 25.40 l 5.11 IO/22157 II.6 3.3 419.79 -1M.98 -19.41 I/ 5160 XI.0 26.4 685.47 t265.68 + 63.31
1960 Jutulf. Kmwty 0 597.63 12/13/61 13.2 734.91 tl37.28 +23.DI L/26/62 19.6 6.4 535.76 -199. I5 -27. IX II/la/64 48.4 28.6 891.71 t355.95 t 66.41
I964 lynltoa a. Johnson 0 875.51 2/ g/66 IS.2 995.15 1119.64 113.71 ID/ 7/66 23.1 1.9 744.32 -250.83 -25.21 g/25/67 34.1 11.6 943.08 4198.76 * 26.7x
19cll alcherd N. Nixon R 946.23 I2/ 3168 I.0 9a5.21 + 38.98 t 4.11 5/26/70 la. 7 17.7 631.16 -354.05 -35.91 4/28/7l 29.8 Il.1 950.82 4319.66 et 50.61
1972 Ylchwd W. #iron I pBI.aD I/ Ill73 2.2 1061.70 + 66.90 * 6.81 L2/ 6/74 25.0 22.8 571.60 -474. LO -45. II 9/21/76 46.5 21.5 loll. 19 t437. I9 t 75.71
1976 J-S f. Certer 0 966.09 12/31/76 I.9 IDD4.65 3a.56 t 4.01 2/2at7a 15.9 14.0 742.12 -262.53 -26. IX 1 7
Averages:
ShK* IYDO a. I 122.31 21.1 II.7 -33.51 44.4 23. I + 81.37
Since I945 7.8 +13.6x 17.2 ID.9 -25.7x 41.5 24.1 + 60.91
l Frm ll/3/lY Recovery Hlyh of 119.62.
‘* from 6/15/4a Recovery High of 193.16.

SOURCE: William M. LeFevre

I Granger 6 Co.
I

::

I
 HOWTO TURN FUNDAMENTALISTS INTO FRIENDS

David L. Upshaw
Drexel Burnham Lambert Inc.

Fundamentalists control the investment business. Many I if not all, money

managers were security analysts before they got their present jobs. Like it
or not, technicians live with, and many work for, fundamentally-oriented
people. A security analyst talks the same language as the money manager. A
technical analyst has to overcome a sort of professional culture barrier to
even be heard. Technicians need to find ways to interest fundamentalists in
technical methods if we are to make our way in the world.

One method that I use to make friends of fundamentalists is to process

fundamental data as I would technical data. A client may not have much
interest in advance/decline ratios but that same client works with p/e ratios,
yields, interest rates, and other fundamental data -- all of which can be
subjected to technical analysis. This paper is about one way of applying a
technical method, rate of change, to a fundamentalist's statistic, the
market's p/e ratio. Once a client sees that a technician can do interesting
work with fundamental data, it isn't difficult to lead him to thinking of
technical data as potentially useful information, and not as witchcraft.

Some of the factors believed to influence the market's multiple are: the rate
of change in the money supply, the rate of inflation, interest rates and con-
fidence. Probably the reason so little work is done on multiple forecasting
compared to earnings forecasting is that so much of what influences multiples
is not very forecastable -- particularly confidence. Analysts may correctly
forecast money supply change, interest rates, and the rate of inflation, but
they have a very hard task forecasting the market's confidence level six months
or a year out. (Forecasting confidence is not the same as surveying current
levels of confidence, in my opinion.) --

Hence the problem: multiple changes exert a very large influence on prices.
As multiple changes are very difficult to forecast, price changes, therefore,
are difficult to predict even if earnings forecasts are right on target. If
we can't accurately forecast multiple changes, we can at least observe them
and ponder their implications.

Enter The Enthusiasm Index. This index (EI) is simply the quarterly percent-
age change of the S&P 400's multiple. In practice, the EI is computed weekly
rather than quarterly by comparing the present week's multiple with the multi-
ple of 13 weeks (one quarter) ago.

The charts that follow show the Wednesday closing price of the S&P 400 and the
13-week rate of change of the 400's multiple, or The Enthusiasm Index, for the
period 1955-1978. The EI has a remarkably narrow range over the 24-year
period: from +30% to -3O%, with most of its action contained within the +20%,
-20% zone. The charts suggest that there are limits to the enthusiasm and
despair the market can generate over any given 13-week period, and this appar-
ent phenomenon may be useful to us. To see how, lets examine the following
five charts, which show the EI in 5-year segments.

- 31 -
- 32 -
I \\ 1
3

- 23 -
R
I

c .

i
/

LR
I 0
3 - 34 -
 ) )

I’N’L‘!IIJSIASM INI
30 130

20 _____ ___.--.._---.-
120

S R P 400 PRICE/EA
--13 WEEH
---- .-% CHANGE
--- XALE
-.-. LEFT
---.- . _--_----. ._ 110
10 \

0 100

-10 90

IO0 WEDNESDAY PRICE

-20 ---_.-. ._- ._.-._-__-__.-_ 80

III III II III III III 111 111 11 11 111 111 1 III1 III II II 70
-30
1970 1971 1972 1973 1974

‘~‘heET from 1970 1974.

through In 1970, the EI bottomed at -13% in January, turned up strongly, only to crash again
LO -12.5% at the market's
stock low. By August 1970, the EI had peaked at t213, a peak that led the April 1971 price
l)edk by 35 weeks. (The AL)ril 1971 price peak was also preceeded by a second EI peak of +21% in February 1971.) As
in 1970, in 1971 two EI trips to -10% occurred as the market rallied from August and November low points. The EI
peaked at +15% in February 1972, 46 weeks before the market's 1973 major top. (At this time, the lead hdd stretched
out to resemble the leads of the late 1950's.) The years 1973-1974 were replays of 1969-1970 for the EI, with the
I irrdex negative, rallyiny only to the 0% line. In early 1974, an historically large negative readiny of -20% was
w followed by only a feeble rally, not a bull swing, and the EI barely got into plus ground before erastring to -30% in
"I September 1974 -- rouglrly the same level as the 1962 low.
I
A .X)-week moving average of the weekly EI appears on this chart, starting in July 1974. The use of a 30-week moving
CA
ve ra<je is a smoothing technique which sometimes helps to show basic, underlying trends. Notice that the weekly EI
bullishly crossed dbove its moving average in October 1974.
T

0I
I - 36 -
 Published in the zfay 29, 1978
THE WALL STREET TRANSCRIPT

Participants: Walter Deemet

iJiliiamr Doane
Donaid Xahn
Alan Shaw
David Upshaw
REPRIXTED 3Y PERMISSION OF
THE WALL STREET TRANSCRI?T
Richard A. Xolman, Editor

heq
- _-IT.-~tma~jTmt
_.- . not work this time around.

years ago, and in fact. the indicators that met oi us use have
raven out znd stood the test of what is pMbi the meet
2.dficult time in the securitiesindustry since the 19&s I think the D&wJonesor the New York composite avera . !?y-p%
that heuuse of that market timing has gotten pwing ac- “We’re right. It’s a bear market.” It’s really a htt 8 of bo .30
ceatance among institutional and individual investorx alike. one big c‘hange we’re having to work width is that it’s not a
IWST: Aim?. homogeneous market at present by my meansThe other is the
M&.;~W% a little bit- I think one of the real &an- evolution that a couple of ie have *xdy mentioned of
over the last twenty-four months har been amrket aadysia going kyond p”% e stock market and anajyziaq
~crncturai, within the market. This shift has necessitated that money markets, and the internacioaal markets and
we addressthe market on a weighted and an unwei hted basis. relate them ail together. E&on Gould. way back when. WG
Application of sow of the more popular :heories.Tiketaargia ion treasury amrket asoneof his iadicatorx. and I think we’ve
deb& memberand speciabst ratios. even short iaterut hasCOa evos ved from that into what is reseatly still a fair1 elementary
demeebeendZferen+ Certlin etiecu of ootica vading havehad analysis of all money aiar e eta. It’s an evouuoa r that’s
to be considered. Institutional portfolio asset real.location. prognesing rapidly now and will probably cuntinue for some
indexin as we& has had a bear&q on some of the indicator time. but it’s ~II evolutionary changs rather than a
!eveia t%at have meant somethintz to US bf0r-e. But I think rwohltiollarv one.
where the market analyst ban beea chaileaged really over the
past ei@teen to twent@our KMMI*. hasbeenin hie abilfty to
see $XX& the forest., to try to vividly identify the trees. It
hEiTeecveyar nmrxecfor the eatrre hst of stocks.
Mr.
_- U&w: The &an- Tve seen in the last five to tea YCM &ail
.~~effathutbieh~iayeurview.oa
ia thai && and more 6chnic$ns are rtting inte?k g b&e
money ride of the quauon. soma tee ~~lctana toda sir. Shaw: In part we*havealso had to deal with changesin
bcking at interest rate spreads, bank reserves an the bond perceptioa. When I wax in schoolI arastaught that money
market. five or tea years ago bard1 knew thaws numbers supply,as an exam le. represented a source of demand for
existed. m]neU anroau them. ?iu Ys the 051~ tread that
I include common stocks. An % that over time if an increase in mosey
I can to be a c&meat to-that fint question.
see I penoarlly
don’t know of a lot of brand-newor unheardof market statistics
watchin. and an i&ruse ia moae supply ii ivedtobe
negativb-r.he Fed will have to ti sh tea up anLF- mterest rates
shouldtherefore go hr or. e* In yean put the &count rate
exerted the upwardan$ dowawardDrusures on the prime rate.
Over the last tea years the relationship has reversed. and
changesare no loager as moderate.This hasno doubt been a
factor behind the more volatile quitv treads we have wit- . e
m?sed.

I think Don is absolutely right. It behooves us to maintain a

TWST: Dma? r - strong observation of alteraate areas of investment and
Mr. B&a: Yes. but doa’t you thfak this increased axe of trackmg both short aad lung-term rates is key. But we must also
monetary figures and interest rates really wasn’t appliabk teyect~stah price treadGperceptioa can Change.Right now
until tea years ago? Before then, iatenst rates were geaerxfly we re bein treated to an unorthodox sitaatioa. a little window
so low that they weren’t a competitive force with eommoa bar openJ’ m the last month, where wehave witnesseda .moa3
stocks. But I’m not sureit’s anvthinp new.It’s just that it wun’t quity amrket while there hu also been a strua upturn in
a%wr:
-_ I&
iicsbieu until we got into ihis h&jr interest rate period.
--~
.b. Deane:I think one of the thing that is new in the realmof
interest
analyze
mtes. Perhaps
rice activity as it
Bill and 6 ally hit uponthis..
our araia responsibility sif olud
to individual stocks.Both
tams up anproacb.
be to

From
market tvniag analysis is model building.Let ma explain.For stock price behavior ~SWIUIB group behavior and then seeif we
the axt tweive years we have beencorrectin the excweesof
the bls. We have experieacul several mini&Al mnriremand
several mini-bearmariiets, and it’s very easy at this Mr. Deemer: I think this interestrate pointk redly a key one
look back and matall thoseindicatorsWther that cilv-ed the becausethe bond stock yieM s read has been h favc? of bonds
1966 top. the 1%8 co the 1972 top. aadhwis put all these foo?gs sowandmoney,saJ!eea &Cning out of equitiesand
iadicatorstocether tI-at called the ‘68 bottom. the 70 bottom mome arms. As Bill’s oqanizatioa and mine both
and the 7-I bottom. The markef howwer, has a habit of putting ‘know.fund s8iu are ly in iaccmeoneated produets now
out a smokescreenevery time somebodygets wind ot its in- and not quity oriea2 producu aad the equity oriented
tentions. I t!Gnk investon are ‘becomingoveriy indicator- productsthit are beingti t am inearnsreiar.A rather than
coascicus.Thesemechanisticor static modetsthat have beenset growth oriented This in wPat the pubiic wanrs. As long as
up based on :he craditioaaiindicatorsthat haveworked soweil money is bemq shift4 in this way. as !onq as the level 01 :in-

- 37 - Reprinted porn the Wall Street Transcrtp I

terest rates is attractive enough to cause eople to want to shift
their money like this, I think it has a lot oPimpact on stocks. One
teas to keep in mind that while stocks are very cheap historically
here, this is the first time that stocks have been cheap at the
same time the bonds have, so the present situation may be a
little different than past experiences.
TWST: How about institutional versue individual ownership?
Does that chau e the rate of the fluctuatioo in any way?
.Mr. Deemer:7 don’t think it does. I would ureter to see more
public participation becauseI think trends are lesschoppy with
It. The Bull trends of the 1950’s were long-lived and reversed
slowly rather than abruptly as in the institutionally-dominated
market of today. As a market analyst, I would prefer to see
smoothtrends rather than choppytrends.
TWST: Bill?
Mr. Deane:I don’t have anything more to add in the interest
rate are+. I do agree that investors (institutions. individuals,
and even foreigners)will shift their assetsto thoseareaswhere
the perceived returns are the greatest-be it debt or e uity
instruments.I do,feel that there s noquestionthat this ad%s to
the broadnessof technical interpretation. This has certainly
increasedin recent ears.This increasedcoverageincludesnot
on1 interest rates iiut also commoditytrends (inflation rates)
ancr perhapseven exchangerates (the trend of the dollar) and
international flow of funds.
Institutionalization has,

WALTER R DEEPER is Se&u Vice Resident-Market AM-

historical repetition of behavioralcharacteristicsthat we watch

rather than the absoluteimbalances.
TWST: hve?
Mr. Upsbw: I’d like to pick u on Walter’s remark about the
institutlonalixation of the mari et going hand in hand with
markets that are more ch py, v6iatil-e and more quick to
reverse. It’s onethinn to savoehe marketshave beenchooovand
more volatile over theelast-ten years. It’s another thin’g’io la
that all at the doorstep of the institutional moneymanager.If
a backwardfashionto what one mi ht have expected if or12was
thinking about the institutionalizafro II of the stock market. A
naive @rson might have thought, “Good, let the institutions
come m and dommateit becausethey’re long range thinkers,
the ‘re calm, the don’t losetheir headwhen the amateursdo.
An i; we shouldKave a more placid. efficient. stable market
becausethe institutions are long-term buyers and they know
what they’re doinu.” It didn’t turn out that way. The bigger
seller d&s not hate a vast horde of smallerbuyers to sen-to.
Today the 100 thousandshare seller has to fmd another 100
thousandshare buyer and the changesin mostcasesare not at
an eighth differential from the previous trade. But the in-
stitutionalization of the market hasresulted in a market that’s
epemtor.
somethin that could have been gleanedout of monetary data
and very Hew people, except maybe the BankCredit Analyst. 10
or 20 years ago, were in that mine. Now everybody is in the
minedl ging away at the samevein -trying to extract that data.
Twsz Don?
Mr. Iiahnz Dick, I don’t think you can possiblyover-emphasize
the complicationsthat interest rates have causedin the stock
market. When you look back this hi interest rate period
starting in the mid@‘% and then you r5b ook what’s happenedto
the stock market, the stockmarket hasactedvery rationally. As
the competitionfrom rising interest rates hastaken hold, it first
got the individual investors becausetraditionally, they have
alwa s beenmore incomeoriented than institutional investors.
So t e were the fit to drop by the wayside. Institutions
noti!! this m the early 1970’sand acceleratedthe trend when
the last of their hopes.the growth stocks, ot hurt in 1973and
1974.I would even goso far asto say you wff1not have anythmg
but mini-bull and mrni-bearmarkets until you get substantially
lower interest rates than we have right now. I can’t seeany way
of sustainingthe market’s 10 to 15 year plateau until you
substantially lower interest rates than we have right now.52
numberone.interest rates are the causeof why the market has
done nothing for 10 or 15 years and two, I think they’re whv a
lot of individual investoti have left the market and-why->c-

from. I won’t commenta’nyfarther on interest rates.

One though about Don’scommentthat the reasona lot of us
started tracking money data in the last ten years was that
finally, rates tit to a level where the were high enoughto
reallv matter.4 aareewith that wint. d on. it’s a wad one.The
oniy-contra statement to that I would have is t&at the bank
credit analyst has had a monetary thermometer for decades
that’s been helpfuL And it’s worked reasonabl well during
periods of low rates as well as high rates. Bo there was

Reprinted from the Wall Street TranscriD t - 38 -


JAbI S. DOANEis Ceerdinator 0fTechrriul Besearch at
originally schooled. Although not considered a sin le indicator, I
would want to know the technical position of the so stocks that
corn ose the Dow Jones Industrial average. an extremely
help f ul exercise in attempting to define the potential of that
average volume figures, yes. Ihey would be helpful relative to
price change. - - -
TWST: Den?
Mr. Hahn: I would say rate of price change, rate of change in
wiceearninns ratio. 100 dav volume. odd lot short sales and an
indicator of &es-of-change in short interest levek.
TWST: Deve?
Mr. Upsbarr: I’d like a couple of indicators to measure the
mutual fund cash position and its trend Add to those the
percent of investment services who are bullish or bearish,
whichever way you like to slice that one. and the trend of those
num’bers. Id like to know what the discount rate would be. I’d
like to know what the rate of inflation would be or even better
what the market perceived it was going to be over the next 12
months, and I would join my colleagues who voted for some
measure of the rate of change-of stock-prices.
TWST: Walt?
Mr. Deemer: This will sound pompous, but I mean it. All I need
to know is what long Treasury bonds are vielding. what the
prime rate is (which ‘by derivation will ‘ve -me the&mmerciaI
a r rate, and both yields will, by Ferivation, give me the
!n fGi on rate!, are we in a recession. and if so. how many months
into a recession are we, and how many months from the trough
are we? Given that these are rather difficult to determine. even
thou h I kee ho ing I will run across someone who can teU me
in ad%ance P WI‘Ip give . you some more conventional ones, which
would be advisory &vice sentiment, volume levels, and what
mar ‘ndebt is.
T&T: Dave abet de your in&e&us tell oa ebeet the eaurse
of the Dow idace. or the S&P 500 or ho Amerho Stock
Exchw or over the eoaater. What do they tell yea eo say
merket you went to zere in oo? Your foreee&?
Mr. Upebaw: I look for a consolidation period over the next few
months, with the low end of the range around Dow 999. give or
take 20 points.
TWST: Wsft?
Mr. Darner: It seems to me we’ve got one of two situations
here. Either we are starting a new bull market with a record
level of volume or we are in a classic bear trap. At the moment I
think it’s too early to telL but market cycles usually peak one
sector at a time while the bottoms are usuahy made pretty much
simultaneously in all sectors, and the areas that resist selling
pressures into a bear trend usually get hit eventually. So my
thought haa been that the secondary stocks as measured by the
39
Indicator Digest or Value Line averages, are going to have to
correct before this complete market cycle is over. My guess,
therefore, is that this wih eventually prove to be a bear tra *
t$ztvsyg;e resemblances at the moment to October of 197 f .
Mr. H& Dick. we have felt ri ht alon that we are in a
secular bull market that started in 8te 19’79: The Dow !s in its
first correction iollowing the initial leg of that secular bull
market. The secondary stocks, within the next six months, will
go through their fit correction. I think that will complete the
transitionary phase between the first major wave and the
second major advance. So I would sa that over the next six
months I’m pretty negative on the mar Ket. because I don’t think
this transitionary per& has been completed. There is a major
element of the market. as Walt mentioned, that hasn’t been
corrected yet, but I think that will come and then the Dow will
go below its February lows. When all of that is corn leted you
will still be above the 1974 lows, which will be the &st time in
ten years that major lows have been completed above previous
lows. The market will then start the second major wave of the
long term bull market that started in late 1974. So for the next
six months I am very negative. Beyond that, I couldn’t be more
bullish. But I’d have to go back to my earlier remarks that, for
the bullish part of this to happen, you are going to have to have
fallin interest rates.
TWIT: Walt?
iMr.‘Deemer: Don, this is a tough one I know, but how much
risk do you see in secondary stocks over the next six months or
so?
I&. Helm: Walt. I think the Value Line on a daily basis, and I’ll
use the Vaiue Line since you mentioned it earher. went from
about 45 in December, 1974 to 102 or 102 recently. I would look
for a very minimum one-third correction of that move, which
would take you down to the 75 or 80 level. I think because of the
liquidity in those stocks, the whole correction could happen in
two or three months.
TWST: Ah ball or besr?
sort of a setback in here or at least some phase of price con-
solidation. From looking at the individual components of the
average, this certainly appears to be the more probable course
of events. Perhaps because it’s so simplistic, and seems so
robable. the market wiIl just keep going-u from here into the
loo* s and complete this cycle of the weig4 ted market’s rally
without the consolidation taking place fiit
The initial upsurge was ve much artifically generated. I
think we’re alI aware of that. 7 et I don’t take that as a bearish
argument. that the weighted sector has to come back and test
the lows. After a& as technicians, we are always alert for
certain aspects of initial artificial demand, high short positions
for example. It’s been conjectured that a large naked o tion
position was to a great degree responsible for the i&a 3 up
But we did have, I think we% aU agree on this, whether m
!% r”:s&t or at the time, a small bottom configuration that was
resent in the weighted averages which was unlike the period of
B ctober 1974. That. in my mind. diminishes the chances that the
market has to come back and test 740. a third to a half puU back
toward the 590 level could suffice. Then I see the weighted
market, after either the dullness as David points out, or the
correction, resuming its u side probe into the 900’s lookin out
into the summer months. PIt s kind of fascinating, that if vof ume
implications were to hold true based on historical relationships
at market lows, higher turnover ma still lie ahead. This period
has been a period of dismay. We aH fairly well acknqwledge a
general lack of participation by the domestic in&u6on. A lot of
cash still sits out there, and more might have been generated by
some selling into the strength. If the weighted market were to
show strength in the summer months. I think the volume in-
- Reprinted from the Wall Street Transcript
dications could be rather dramatic
This is ouite concentuaL but the market rnav be settinn itself
up for a’ rather sdbstantial reaction follow&g any siimmer
strength. Based upon our current interpretations, the mid-900’s.
or so-is about thi most we can project a further gain in the
weighted market, even if the consolidation were to take place
over the short run. If we were to ex erience a setback in
secondaries and weighted stocks simu Ptaneously. you could
superimpose the lar e margin debt over the whole picture. It’s
already a fact that t ife rate of change in margin debt has waned,
and with the rise in short term rates, margin debt disappears as
a source of demand.
TWST: Bill, whet do you see?
Mr. Doene: Well, I think the $64 question is. “Is this the
beginningof a bull market or is this a rally in a bear market?” I
hate to answer a ouestion bv askian another ouestion. but I
think it is pertinent. How d&s one defiie the &t two’years?
Was it a bull market, a bear market, or a transition market?
Tmha;m h to answer unlessone defines what is being
at are ou looking at. the secondarystocksor the
primarys~smalf capitalizedcompaniesor large capitalized
compames? I think, in many respects,we are missingthe boat
when, in an over-sophisticatedmanner,we try to put all these
measurestogether and call it onemarket. Likewise, goingback
to our elementary lessonsthe textbooks tell us it has ot to be
either a bull trend or a bear trend. As I seeit, it is neit .I er. For
the momentit is neither the beginningof a bull market nor is it a
bear market rally to be followed bv substantialrisk.*1think we
are experiencing an extended advance for secondaries.the DDNALD D. HAHN. C.F.A., is Dimctor of Rmeuch-
resumption of an advance for cyclic&, and an init%l advance Investmenta at Becker Securities. He iu a grduata of the
for growth stocks.I think investors asa wholeare getting hung University of Wm ad hofdea MBA from the University
up in levels on the Dow. The are getting hung up on the ofChicago.HebaumhermdputdbctoroftheChi
correlations of the various teeIi.mat1 economicand monetary Society of FiicM Analysts. ,Muried end the father of two,
T e
indicatorswith not only the stock market but alsothe econom is aieoon the school&rd of YorkvfIle, Ill. Hahnenjoys t4xmia
I think if we go back to the ori . s of technicalanalysis-simp fe’ M weUM raieingdogsaud swene.
chart patterns--I think it woulds” keep them and usout of a lot of
trouble. I think if onewould review severalthousandlong-term
chart patterns, to me the only confusionis that there are an
extreme numberof very impressive atterns out there but yet
we rationalize them away. One wouPd have to go back to the
1940sto find a similarnumberof similarattnictive patterns.
Being more optimistic than pessimisticI firmlJr believe that months.It could be ready to resumeits longerterm mark-up. So
somewheredown the road oneby-one these tterns are going the lack of major risk within the 30 Dow stockswould be my
to work out. They’re ing to be resolved 00 t Y-f
e upside in terms secondbullishpoint.
of higher prices as $ he majority sit around twiddling their A third uoint we could ooint to is the movinn averaze
thumbsand over-emphasizingthe negatives. relationshipsin the Dow prkession. This is the fiit’iime sin%
Bather than get hung up on the levelsof the Dow and whether the market peakedin Septemberof 1976that we have had a
or not the sh&t, intermediate, and Ion -term trends are down, ition, not on1 of the very short term moving
up, neutral or indifferent. I think we % ave to return to basics Es?g LeEin what we classifyas the intermediateterm
and take it on a stock-b -stock basis. relationshipsasmeasuredby 25 and SO-daycomputations.And
TWST:Alm,tiyou EdtopatonthehatofthebaUishside, the downward slopein the 2OOday has also started to show
what do you think are the three or four &wlgeet indiatore for somewaning in recent weeks. This is the first time we have
you to sup thebulli&ceeeaudtheoIweutteaeewhetyou witnessed.as I call it, the cooperative effort of the 25 and 50-
mightthin ew’arethsthreeerfourstreIlge&indMeretosuppert day computations,they could’well be setting the stage for a
thi kuiI3h um 8t thin pint. change in the longer-term momentumcharact.eristiu of that
Mr. Shar: I’ll start this way, Dick. Perhapsthe mostpositive avera At tit thought, those would be my three most
case for the bull, in my opinion, is the relatively hi’h cash favomT le aspects.
positionsthat exist. Whether it be measuredby mutualfundoor
measured b the pensionfund or the bankmanagedfund. As an TWST: Don, juet 00 rhe hulbh aide, if you had to
adjunct to tKat, andperhapsmoreof a conce t, I think the trend whatdeyo~aeeuthetbmeorfomrstroageatpGra -!iEPaq
of assetreallocationwithin the professlo’ Jy managedaccount Mr. H&a: Without necessarily endorsing them as valid. I
has to be tested. Manv de&ions have beenbusimss-o riented. would say the strength in the dollar. becauseit hasobvious1
not investment. They have comefrom above.Then ERIBA h& given more confidence to forei h investors. Number two, f
played a role. and the high level of interest rates has had a would say the volume figures. I! ou can argue that the market
bearing on bond preferem over stocks.I would sensethat on should have moved a greet deal more than it did on 50 or 60
balanceit’s beenrelatively easyto let ash build u , or to choose mihionsharee,but it b still very impressivevolume.
fixed incomesecurities over equities. The welg *% ted market- Third, I would say the breadth of the market is reasonably
place has. of course,beenaccommodating. I think the market mmd.Its not as eoouas what we wouldIike to seebut breadth
ma have to test the concept,and there mustbe somemarginal ‘iever broke dowi badly and hasbeenable to makea significant
casK out there that will probably, without too muchhesitation, recovery in the lastcouoles ef months.
come back into eouities. So the reserves reuresent our most And fourth, what we all know is that stocks are cheap.You can
bullishpoint. ’ go backand comparethem to book value, priceearningsratios,
The second,and I’m going to fail back onto somethingBill ieldsandwhat nave ou. and stocksare chesp. So thoseare the
Doanebrought up, is whenwe analyzeindividual stock patterns four thingsthat I wou Pd consider asbeingreasonable optimistic.
that composethe Dow Jonesaverage. Prior to the recent mark TWST:Bill,w~&you~M~tbsthneortocB~t
up, and f admit this, someof them went lower than we had point3 in the bd CMe?
oreviouslv anticiuated. But in the main. those30 comuonent Mr. KhunezLet me further narrow it down to just two stron
&ocks not only &ached but more than adiquately fulfill& what points,Dick. One.as1mentionedbefore, the long-termtechmc 4
downsidepotential we couldtechnically arrive at Sofrom a risk patterns of individual companiesas viewed on monthly cttrm;
point of view, lookin at that massof equities, the downside covering a period of several years. Thesecan only be
wtential anuearedto %ave beenbasicallysatisfied.I think what with similar patterns that were commonin the 1240s. TV e aU
Walt refer%d to is our current needto-tr and quantif , from know what ha penedin the 1950sand’60sasonebreakoutafter
whatever approachwe take, the reward. Qn my way of fooking anotherled to Righer prices.
at it. this makes it eventuall necessaryto see someprice The secondis values as Don just mentioned.(See Chart Il.
consolidation,or evidence of Lrt her basebuilding behavior. This C&year trading range hasaccompbshedwhat it set olrl tu

Reprinted from the Wail Street Transcrpt - 40 -


ALAN It. SHAW is Fii Vice Reeideat and
Market Ikearch Services, at Smith Runty, Harris U
hes pursued stud&H at Susquebanne University
Uaiversfty. He is. a ~membar of the NYSSA aad
Teckniciaar Assoaatma. Shau is aiw a c&mnfst for FM
World: he is the author of the chapter on Technical Analysis io
the Fiasacfal Analysts Handbook; and has been au inscrrwtor
the New Yerk Iastitute of Fiiamee for twelve yeus.. M&ii
pm theeither of three, be enjoys boating and gardeiung m his
valuation level .in the market without having a panic: so why do
we need a pamc to get a bull market started? So my reasons
are about the same as the group’s here.
TWST: Wait?, oa the bear side,. what are the strongest
f~torslnyaunewto-bukth~Rpslh~n?
Mr. Deemer: The bear case. I t IIU. IS interest rates. the level
thereof and the trend thereof. As Ned Davis of J.C. Bradford
the Fed to City HaU it usually just
Hall. Interest rates may reverse
at the. moment they are both high
and rising. I think this also says somethin about inflation. One
thin,g. that’s, usually present in a pen iJ of low valuation of
equities is hi h inflation rates. I think it would be helpful if we
could curb ini! ation and thereby get interest rates down.
Second oint: s eculative activity, I think. is high. The margin
debt eye{ is bat! The quality margin debt isn’t alI that ood,
and the level of margin debt is at an ah-time high. A kot of
speculative activity is going on in takeover situations. And third
is sentiment. institutional sentiment. We tend to be getting
pressure here from our clients to put cash in the market while
m the fourth quarter of 1974, we ot five requests from clients
not to uut any money in the marke & I think at a truly maior low.
you have high cash levels and a desire to keep them high or
even higher, whereas during bear market rallies, you have hi h
cash levels with a lot of pressure to put the reserves back in tf e
market. So I think this sort of sentiment measure is not bullish
at the moment.
TWST: Dave?
%lr. Upskaw: Two I share with Walter. Number one on my list
also is interest rates. It’s ‘ust not typical for a market to bottom
before interest rates pea L and apparently they’ve not peaked
VALUATION MEASUREMEJ’JTS

do. namely, correct the excesses of the ’60s. Look at the

price earnings ratios of today as they compared to 1961. This
19 true to book value rsiationships: it is true of stock yields as
web as their relationship to bond yields; and it is even true of
the d&u as it relates to other strong foreign currencies
TWST: Walt?
.W. Deemec My colleagues have already mentioned host of
them. But putting them all together there ~9 a ve strong cqe
that the market made a su rcyclical low in 1% 4. which is
something Don muationed. ../y 1 is is. key because if this is true. we
are evolvmg from a lon range unattractive period for stocks to
an attractive one. I thl 2-L the evidence is growin that this is so.
I think the key thing is: are the Value Line 7 ndex and the
Indicator Di est averages going to hold their 1974 lows during
;his trend? fk IS was a very controversial thing to say a ear or
so ago, but now looks quite probable. That means that t fIe long
range picture is changmg to a favorable one: further evidence
would be the valuation level that everybody recited. You’re
oin from a trough in values back up towards more normal
keve Bs and then hopefully to overvaluation levels sometime out
in the future.
TWST: Lbe?
,hir. Upakaw: On this one l’m really an echo but I would have
cited these had I spoken first and at this point I think the ‘ve
been covered. One, the action of the broad market itself. % ou
can’t deny the fact that prices have risen a jot. The weekly
advance/decline line final1 bested its high of last July. So have
the Value Line Index an d the Indicator Digest Average. The
market itself is saying that it wants to up and that’s what it’s 75
been doing. That’s pretty impressive. El ost everybody at the ~I~lI*ll~i~l*~l~lUl~l~l~i7ll~l~l7~~~~m~n~n~~

table commented on that in one way or another. CHART I

There are not many peo le I know of who have been converted
by the rally. The guys w Iio were cautious or bearish before the
ex lesion started are still that way. Those who were bullish
be Pore it started are convinced they’re right. But there has not
been a mass conversion b any means of the bear side. The
bears are etting more an B more shrill as the market goes up.
There’s St.1 fi a lot of doubt about the staying power of the rally.
And finally. a point ever body touched on, the whde thing is
startinq from a low va Puation base. Stocks are still quite
reasonably priced. They’ve come up a lot. but they’re certainly
nowhere near bull market eak valuation levels. As Peter
Bernstein recently wrote. 4 e’ve managed to reach a panic
as vet and most forecasts are for them to go higher. Granted the
bulls have counterarguments to all these reasons. I’m just try-
ing to state reasons~again, as Don says, without really endorsing
them one way or the other. Number two, the rise that we’ve had
really didn’t start from an extremely oversold condition. If we
had a bear market bottom. it was one of the strangest ever in
terms of the traditional overbou t-oversold statistics. And
three, margin debt can be look * at in one of two ways. It
represents a tremendous amount of stocks to be liquidated in
that historically, few, if any. bull markets started without a
prior liquidation of margin debt. The positive aspects of margin

- 41 - Reprinted from the Wall Street Transcript

debt is that we haven’t had a bear market when margin debt
was rising. Margin debt haa risen steadil.J for . three and a half
.
years, or sincelate in ‘74.Margin debt st ISnsmg, but it is not
oing to rise forever and there’s a lot of money out there, $10
%.
Jho?
. worth of stocks, someof which at least are subject to
calls. It’s a lot of debt overhangingthis market.
?%?-E Don?
Wr. Hahn: In somecasesthis will overlao. but the four that are
mostsignificant to me,Dice, would be, first of alL a whole host
of intermediate indicators.Insider fi res. overbought-oversold
indices,we have about seven or elg T t of them. Not in onecase
did they comecloseto bullish levels. Right acrossthe board,
comparedto any bottom you can find, they didn’t comecloseto
registering a decent bullishsignal and in manycases,of course,
they’ve deteriorated since.So if this is a sustainabie.long-term
advance, it will be unprecedentedfor a whole realm of in-
dicators.
The secondone would be the interest rate trend. Peoplewho
have money make the market go up or down. They now have
alternatives, and that’s fixed Income investments. It’s itist
unrealisticto expect. unlesssuddenlythe psychologyis goingto
hvperinflation. a sustainableupward move m commonstock in
the face of 9 percent long-term money. It just isn’t going to
h.wn.
w: It’s aoinn to be fun when we trJr to tie this all up
later, Dick. I think that we’re all somewhatsaying the same
thing, but we’re just kind of off in the timing aspect.soto s eak.
I would have to agree with thosethat have already brougRt up
margin debt as one of the prime negatives. Interest rates
certainly play a role here. We have ‘ust notched up our debt
chargesagain.I think we’re at the lug 4 est level sincethe fall of
‘75 in what we are chargingour mar n client. This haagot to be
a negative influenceon the useof def t, thus we losea sourceof
demand.And I sharethe sentimentof thosewho are looking at
debt as beinga potential sourceof supply. Of coursethat would
necessitatesomesort of a weak internal market structure to
develop. A point that hasn’t been brou ht up concerningthe
debt. however, is somethingthat’s come& the fom in this cycle
that’s made debt harder -to analyze. That is the grGt.er
utilization of debt for non-purposeloan purposes.A lot of this
can be traced to the higher rate of inflataon.In other words,in
somecaseswe have found clients using margin debt to help
meet their patterns of consumption.Our samplesshow that
Johnny has been sent back to schoolfor the secondsemester
financedby a margindebt loanand some of the borrowershave
never had a marp account before. Obviously Johnny can’t be
put back $ the account as collateral if the market starts to
wea+en..~suas~~+mofasecularprobl~mthatsoutthere,
an lmphcation of 1g mterest rates and mflat~on.I couldnt
agree morethat we will probably have to seesomesort of peak
in rates if a cycle of sustainedequity im rovement is to OecuT.
That’s one of the secularrepsonsthat SF ti keepsyou cautious
about the chancesof a sustainedadvance. I believe that the
weightedmarket hasmadean interesting turn here. but it may
end up more or lessin a catch-upphasewith the unweighted
market. We are not currently forecasting that it’s a new phase
that’s goingtotake ‘it well above the loo0 level.
This leadsme to my nextgROinrdIgVentotryandsha~a
’ basic indust
super-bullish market thou t mth ou. your next questIon
should be.“What new areasof leaders uphave cometo the fore
and offer tential to get behinda new sustainablebull market
trend?” TF1~15where I still have difficulties. Our group work
42
Reprinted from the Wail Street Transcript
DAVID i. UPSHAW is Vice Reuidcnt. Research De@
merit. and Sder Technical Anal st at Drexd Burnham Lam-
bert Inc. He heIda a BBA from d e University of Texas and a
MBA from Washgton University. U thaw is .a. fos~sg
member sad fourth president of the Mu Eet Tecbmaan
dation: he is aiaaa memberof the NYSSA. He is married and
the father of three children. His avecatieas range from pho-
tography snd records to small computers.
currently reveals that those groups that were going well, are
doing even better, while those groups that were doing poorly
have simply oneInto a phaseof consolidation.Evidencehasyet
to cometo tae fore of a distinct rotation of market leadership,
especiallyas it pertainsto the weighted, influentialareaswithm
the market.
As another wint. I ~~e9.sI would have to side with mv
colleagueshe&z who “int to the fact thaf unlike any other
bottom of substance,tr 19one did fail to have a breadth climax.
But I’m not at a lassto explain wh , moststocks have goneup.
It’s very hard to visualizea breadtK climaxin sucha trend. This
could tie added to the evidence that we’re really seein an
extension of the unwei hted market’s bull basemarkedf#y a
catch-upin the weightef sector,to then set tRe list up for a more
encomassingcorrectionto follow.
Hr balm: I’d like to ask Alan a question for m own
e&&ion. When you have a high level of margindebt, gut it’s
not for buying stocks, doesthat reall make any difference?
Don’t. investors have to, if their cod teral falls enough. do
somethingasstocksdecline?
Mr. Shaw: You’re right. I’m not saying that this is a positive.
The point rrn trying to makeis that it’s beenharder to analyze
the trend of debt as purely a function of market speculation.In
fact, it could even be more dangerous,Don, becausein some
casesthe debt hasgoneout of the brokerageaccountto finance
other modesof speculation.like real estate. And there is a
gowing fear that somebubbles may be about to burst in this
area
TWST: Are the any discrete sectors of the me&et. either by
indmtry u by any ether defihiea, where yea feel ca&dent
thatatthiapeio~theyarePnd~~aadwiUshermuket
leedership0Verthe next six meatha?
Mr. W: Let me say that I think you can almost go right
acrossthe board andbu almostanyttig. It may benar?owand
selective for a time but f feel that it will eventually broadenand
be all encompassing. For the public investor I would supt
that he buy a divers&d list of stocks.get the certificatesm hk
own name, lock them up, and don’t watch the news a
uote machines.Yearsfrom nowhe will bewell rewartLr Of
f thmk
. if we take it sector by sector, the CydiaJ stocks(the
smokestack-typestocks)are ri ht back where
they started% om - the depressedlevels of 1954. If we look at
the Seeoady stocks, sure, there have been a number of
corn nies that have had big movessince1974.but there are a
whore host of other issuesout there that are extrmeely at-
-
 tractive and just waiting to be bought.. If we look at the Growth
stocks, we have clobbered them for six years. We completely
reversed the psychology. In 1972 everyone wanted to own them.
Now. nobody wants to own them. That is a positive. not a
negative.
In summary, I personally feel that all three key sectors of the
market are curientiy at extremely attractive levels, not oni
technicallv but also fundamentally. A chart showing the P/ E
ratios of ihe three areas would be-most impressive. One would
have to go back Quite a few years to find equivalent levels. It’s
almost c if the niarket is givin us a second chance to bu at
19’74 urices and. as Edson Gou Hd has often remarked, “!&ch
generation of investors is usually presented with one. possibly
rtunities ~--if they know enough- to take
!%an$$ b?%!’ “#$ may be one ,?f those opdortunities.
After axuntil recentlv therd has been almost a complete disin-
terest in stocks, and we all know that the market cannot and
leederskip over thb next six months?
Mr. Shaw: Basicall Dick. as I said earlier, looking at the last
few weeks of usus 7, strength, there’s been little evidence tc
sug est a change in market leadership. There has been some
ear Hy indication that the basic industry contingent has gone full
cvcle. But I look at these issues more as offering limited risk
rather than substantial reward. I might add that this is different
from the last ma’or low, and this%& compiete hindsight. I
went back and loo lced at what we wrote in the late 1974 period.
One could have become somewhat optimistic about the p&e&al
trend of stock prices for two reasons. The growth stocks a
oeared to have entered into extreme near term overso Pd
.s
r&ions, and, on balance. looked like thev could have fairly
ecent short or intermediate term rallies. These advances, that
ne oeriod ahead. When you see stocks that haven’t soid, on
a pric;basis. this low in ten to fifteen ears, one has to consider
that there are a nocd number of would- L sellers over head. This
suggests that it’s goin to take some time for the reparation of
the t,chni@ dama t6 at’s taken place. I see the growth stocks
gartic~tmg in a r%y. thus averaging may make sense in cases,
ut I o not yet see them emergmg as sustainable leaders. A
few clues have come forth within the recent strength. On; nee
only look at the performance of IBM during this
strong weighted market recovery. The stock sdl looz ,.at least
on a relative basis, somewhat negative. I’m sticking to those
areas that have been in the vanguard of positive group per-
formance, but vou will have to be more selective. The aerospace
sector still h?s merit. A few stocks may be overextended on a
short term basis, we still feel that the group has at least further
intermediate term potentiaL I have to admit that some recent
moves that have occurred in the airlines looked feasible in six to
eighteen months, rather than six to eighteen weeks, but on any
kind oi setback or following price consolidation, this would be an
area that I think looks attractive. Selected bank stocks. con-
tainer stocks. cosmetics, leisure time issues, conglomerates are
offered. The less owned issues in the offi equipment sector
still maintain positive technical merit, alon with a number of
retail drug stocks, and some issues in tI e pollution area
Frankly, to date. the market has profiled an escape type of
43
trend. Dick. The stocks of the companies that will get you away
from it all are doin well and those issues that represent the
concerns that wiIl t.a5 e care of you when you get there are also
doing welL
Mr. Deemer: I think that there’s no real area that stands out;
most of the valuation excesses of the last six to eight vears have
been corrected both positively and negatively. Growth stocks in
general that used to sell at four times the market multiples now
sell at one and a half times the market multi le, which is about
as low as the ever get. On the other ban fl, American stock
exchange stoc %s sold at a 28 percent discount to the lNew York
Exchange in 1974. but the discount is now down to 4 percent. So
on both sides of the median. muitip!e you’re contractin I
think the area of leadership at the moment is in the secon f ary
stocks. and this really covers a variety of sectors. We are
enerally a growth stock oriented organization. I think that
t5 ere are a lot of interestin growth stocks, not necessarilythe
owth stocks of the past, w5 ich cut across a lot of sector lines. I
t8. mk that there’s no sector that really looks terribly unat-
tractive. and there’s no sector that looks tremendously at-
tractive. To put it another way, I think it’s going to be quite a
broad advance.
things in the low end that a ar to-me to be tuiniig u in
relative market performance. 5-r e theory behind that is two Pold.
TWST: Don?
~+ir. H&a: We’re uite negative for the next six months, so we
wouldn’t be inchn4 to pour a lot of money into anythin . But for
those who insist on buying, I couIdn’t agree more with b alt that
most of the valuation excesses of the 60s and early 70s have
now been corrected. What that tells me is that you should now
do what a lot of people did too early - you should buy the best
companies. which to me are the owth stocks. That would be
electronic stocks, office equi men cosmetics. life insurance and
soft drinks, among others. %ow?ather than paying 45 to 90
ou can pick them up at 10 to ti times earnings.
because
umeS e-ngsqthe vauation
1 excesses have been corrected. So. if
you’re gong to bet on a sustainable long-term bull market, you
might lust as well do it with the best companies. I think tbere
a&ah& some groups that we’ve been rtimending that don’t
fit neatly into any package, like aerospace. airlines, selected
conglomerates, and some home furnishing stocks.
TWST: All right. Don, let’s t&e tpla other sfde. Somw
zdyzto yea wbhasahund++omd$larfuod,mdtr
acmes the board. Theyre seymg, Hen we ue. We
want to ehaage his teda . It’s a new market. Where do we
generate cesk out of thie air adex hmdT
Mr. Hahnz I’ve got a lot of places, because I would take them to
only 30 percent equity exposure. I would be a seller of a lot of
basic industry stocks - aluminum, copper, chermcals, steel.
rubber, paper. I can’t believe, in the envuonment I see ahead.
that those groups are going to do well fundamentally. Secondly,
they were extremely disappointing in 19761977. So I think
- liepunted from the Wall Street Transcript
there’s an awful lot of overhead suppl .
I think there are some other areas. lie energ ~-Oils. Coal
oil-well drillers. The still have a lot of fans, ut I think we are
oing to have a surp lrus of energy for an extended period, and I
%on’t think you’re going to see good relative performance out of
the energy stocks. We re also m a period of extreme food price
inflation and, over the next six-totwelve months, you’re going
t relatively poor performance out of anythin related to
p&$?or food distribution. I think other mouua m 7.l also have
difficulty offsetting inflation, including re ted industries
such as railroads and utilities. So those wo P d be some of the
areas I would consider liquidating.
TWST: Dave?
‘ust that they’ve had .a move’ and they don’t me& my
bseem
uying criteria, would be tP e tobacco stocks. In some cases, they
almost too good to be true. None of these front-runner
faG-ititkla[;rever. So I might take a look at those stocks.
: .
Mr. Deemer: Traditionally in the later stages of the bear
market everything gets hit, and you get sellingin the strong
stocks ‘ust becausethey’ve held uparid people-wantto take a
profit. Bo maybethe onesthat have not beencorrecting hereare
going to have a 2536 rcent correction They’re vulnerable.
even though they don’t7 ave big tops formed on the charts yet.
overowned but are nolon er growth stocks. There are still a
number of them where I 8. t mk selling programsare not com-
pleted, where the stocks don’t show any particular rallying
tendencies, and I think they’ll probably underperform the
market for quite a while yet.
TWST: AIM?
red with our lists. Auto3
deserve someattention here. The group has not been acting
well, both actual and relative, over the past two to three
months.But I’d like to try and placethe reactionin pers ctive.
it appearsto be an intermediate-term setback.The S&IF. index
of pure electricshad a phenomenaladvanceoff its 19’74low. In
the processa fourteen year downtrend in the relative per
formance curve was broken. I see very distinct signs of a
significant longer term bottom confl
performance curve. The trend of tCON? e ~kr$%~
withstanding,the electricsbeganto co beforethe rally, and
we look for continuedunderperformanceto carry through the
third quarter and perhapsinto the fourth
I agree with Don regarding the food sector. I see weak
technicalindicationsthere. The tire andrubber stocksalsoshow
little promise.I a with what Walt had to say regardin the
oil service area. Kz group is at relatively lofty levels. A ere
are someindicationsof a lossof momentum,ati they probably
are prime for profit-t&in . They’ve comea long way over the
cycle. I have no qualmswit3 the tobaccoarea.
TWST: Bin?
Mr. Lhmae:I’m pretty much in agreementwith the various
industry ups just mentioned. I had written down the
tobaccos,tT e foods,especiallythe utilities, energy (whether it’s
the oils,coalsor the servicecomnaniesl.andthe autos.I’d like to
suggesta coupleof technicals&eenin ~techniques employedby
us at Fidelity that have beenvery he 5pful during these recent
yearsof multiple cross-currents.
The first is analvzinnindustrv groupsfrom a kind of horizontal
Over-Researchedstocks
Reprinted from the Wall Street Transcript
Likew’be, one could segre te all the stocks that peakedin
price in the 19’71-72pen‘o8%s we have done. What we see
TWST: Ah?
Mr. Shaw: Referring to the groups that I mentioned,in the
aerospacearea, from a more aggressivepoint of view. I think
someanalytical work might be worthwhile on Lockheed.I tnink
it fits into what Bill Doanedefied asa goodchart nattern. It’s
ot an underlying major and a significant number of non-
6 elievers. It remindsmeof when Beemgstarted to climb out of
its major base confi tion. Among comments from clients
were ’ We can’t own t t stock The qualit is oor It’s a highly
cw&al business.e&x” Of &urse I,or&A do& havesome
qualified opinionsattached to it, but from a technical point of
view, I think the stock looks super. Nocthn~pqualifiesin that
ou aa not being asextended‘m its price t&rid as Beeingor
!ifAeolL
1; the airlines, we have three ma’or bottom choices.I might
add that this grouo certainly wouldh t into Bill’s classificationof
having peaked in-the early ’70s. followed by a major decline
which in turn wasfollowed by a gooddealof priceconsolidation.
TWA, National, and American, 111that order, fulfill the major
bottom indications.Basedon oneof our screens,we find there
three issuescurrently have the least amount of institutional
interest among the major carriers. The group does display
homogeneous price behavior. at least from an immediateterm
point of view, thus De&a, Brudff, and Centinentaicould also
perform welL United is difficult for us to figure out here. It
robably would beclassifiedmoreasa ma’orbaseconfiguration.
gut it doesn’tseemto beasclear to usasthe three I mentioned.
In the bankarea.M~ufwhrers Hanever hascometo the fore
and looksinteresting in the New York City contin ncy. In the
outside NYC contingent which was acting a ht 3 e bit better,
we have made two seP’ e&ions technically, one being WeUs
Fargo, and the secondbeingCrecker. In the containersector, a
stock that hasgiven evidenceof emer ’ g from a rather sub
stantial baseconfiguration is Nat&anl tx . Another issuewhich
is in a nraduaLbut defllble uotrend is Crown. Cerk sodSeal.
In the &ametics. we’re takinn’a bottoms-ur, akoacb as weti.
Stocks like Albcrtocalver aiid Cl~eeebore;yh’look attractive
although we admit that Avon ma showfurther recovery. In the
leisuretime area we hi hli ht nmswiek asa stock that looks
interesting. It f& into !he %as!buildintz characteristic.In the
congIome&e sector, I’m comfortable with Litton, and in the
office equipmentarea, IBM andXerex might showsomefurther
recovery, -but it’s been mostly the ticonda issuesthat
deserved attention. PHaer-&wee, and NCR w7.ich may be a
little .overextended on the short NII, still have favorable
techmcalpttems underfoot and Gmtrel eta, where perhaps
you get a it of financialplay aswelL a situationthat MU d work
out well. In the pollution catbgory. our pick is Brews+-Feir
I might add one other group, the retail drugs. We’re seeing
renewed interest in Rite Ad and Eckerd, to nametwo that
come uickl to mind.
TWS?E Bii what do yea sin& oat?
Mr. Deane:In the mobilehomearea-which has been out-of-
favor for quite sometime, Id pick sir Among;hez&dLg
maintenancecompaniesthere s A,
- 44 -
Buikiing Mainknaaee, and Prudential Building Mai+unee.
Another little industry, that because of the tncreasmg crime
rate there is an increasmg need for its services. is rotection or
security services. For examGgrink;lnkin:tc Intt;
Wackenhut. Diebold, American
land developers/ construction/ builders is another ‘attractive
area. Kaufman & Breed comes to mind. There are many others:
it is a big group. Furniture companies appear intriguing and
poised for a recovery. There are ten or twelve possibdities. I’ll
just mention a few: Bassett.Ethan Allen. and Pulaski. There
are three lar er volatile companies that have options on the
Chicago Boar 3 . One is HoneyweU. another is CoatmlData, and
finally Polareid. The three of them have done well in recent
weeks, but I think they have still tremendous potential on the
u side. And finally in the growth area, American Expr?sa and
Tp ever recorded in one year. It a pears that under the support of
+%Z Doll? the tender. stock was heavily Blstnbuted into the market. And
.Mr. Hahn: Dick. to continue along the vein of previously then b a ver interesting coincidence. during the last reaction.
mentioned industries, in cosmetics it would be Avoo and when &? M fe Y below 245, it not only terminated a 30 year maior
kternationai Flavors. In eiectrical equi merit it would be GE
and RCA. In office equipment, it wou Pd be IBM. Xerox and
Compater Autematioa. In life insurance it would be U.S. Life,
Capital Iid- and Jefferson PUot. In soft drinks it would be
bC.& and Dr Pepp In aerospace it would be B”s

?&pN%%.?% T%?%%nd Aye’th”e
conglomerates, Aver, City Invest* and Nerthwest Industries.
Finallv. in home furnishinxs.“- Lexxett
- & PIatt. Baaa&t. Kirr&
and H&uedon.
TWST: Wait?
Mr. *mar: I’ll mention just one grout and then mention a
enerahty. Brokera e house stocks tra rtronally go u more
t5 an the market. an dq. down more than the market. Br&erage
house stocks in genera and particularly Merill Lyneb whmh has
listed options traded. The general observation is that I think
that lists of attractive stocks are very long. We put out to our
Investment Divisipn this week two lists of names, one that Alan
Shaw just issued of 43 stocks that had broken out of significant
bases, and simuitaneousl a list that Ton TabelI, another
leading int and figure cK artist, had issu J of 43 stocks that
had bro r en out of srgnificant bases; interestingly enough the
were not the same 48 stocks, although there was some overlap. f
think you can make a list almost aslong as our arm of the type
of stocks that Bill Deane has mentioned tKa t have had six to
eight year declines. built long bases, and are just now starting
u There are an awful lot of names out there.
i- WST:- Sa~~oae you had to pick three, Al. What woukl you
mention?
Mr. Shar: I think Xackhoad would be one, Dick. Fm very
comfortable with Cootroi Data, and TWA.
TWST: Don. what three would you pick?
Mr. Hahn: Boeing, Awe and Servicemuter.
TWST: Bin?
Mr. Deane: SLyline. HoneywelL and Control w
TWST: How abeut on the dawn side? Wad yea pick
candidatea for short 19&r?
Mr. Hahn: Dick, I hate to recommend short sales because,
unless it’s a discretionary account, people get pi eaded and
sometimes et wiped out. We are recomme nP mg sale of
Caterpillar f raetar. I think some of the stocks in the oil drilling
area, such as HaUiburton and Haghee Teei, are canduiates for
liquidation. Another group I think is a candidate for sale w the
broadcasting vup.
TWST: Ah.
Mr. Shw: I’m going to refrain from that one right now. It goes
awinst the gram of the oresent trend. one that could extend
@elf over.t& next four to six months. I think it’s pretty risky.
Dgg!z~~t~~~mL
Mr. Deane: At a price, but certainly not toda ‘s price. I’d ick
probably the three bi eet movers on the exe Kange over tietie
st three years. TITose three would be Paken %boud,
L hut&en Industrfea, and See Coatainera.
TWST:~ve.wwI~tto~eLhe~~~~~to~
queetfooa. What wou&I you ask yaw eoborrr?
Mr. U eluw: Which side of the hard-land&r soft-landing
debate f o the panelists come down on? That is. WYltheaverage
stock as represented by the Indicator Di st Avera
Line come down to meet the Dow be 8”ore a new !TadVdue uil market
starts, or will a buIl market start with the Dow catching up with
the unweighted indexes?
Mr. .%a~: I did a very simple exercise. not all that original as
another member of the fraternit has accomplished it as it
pertains to grou I took about 2v or 30 of heaviest weighted
stocks in the S& F and pasted together’cyclograph charts going
any answers. or to be brazen enough to state that IBM has
traded ot a maior lone term too and is m the process of enterinn
ears of a sustained upturn. Yes, the stock participated in every
iiull market we had up until 1973-74. But it never made a new
recovery high. As a market student, I wonder whether or not
such a rotation in the 500 is possible. I’dlike to hear the other
panelists’ response.
TWST: BiU. can we ask vea to tundle bath of them? Dave’s
?Mr.
uaatIo0 ad Akn’s questioil?
Doaoa I think the key to many of our differences here
comes about because of the numerous cross currents that we
currently have and have had in this market. It’s different; it’s
ue; The biggest cross current, or area of confusion, is this
dUii!t ren d or twetier characteristic. (See Chart II) Can we
begin a bull market when secondary stocks have had three
years of good rformance? Is it likely to weaken and come
down to meet tr e weak area? Let’s return to indicators for a
moment. Some of the indicators measure the total market in
terms of breadth. in terms of the Over-thecounter. the
American Stock Exchange, in terms of all issues. Other in-
dicators that are watch&l key into just the large capitalixed
issues of the Dow Jones Industrial Average or the Standard &
Poor’s, and so forth. We’re never going to get all these things
&tin tmther as pieces to the puzzle as we d like to see and as
we dr% see in 1962.1966. and 1970. Do we have to zet them all
together? I wonder. We have been conditioned by &s whole 12-
year trading range to expect them to get into position, in fact up
until now this has occurred every 4th year. Do we have to carry
on this 4.year cle? If we did, wouldn’t it be quite simple? is the
market ever t?a t simple?. If this is a Z-year correctionary
‘od where we’re correctmg the excesses of the 1960s. and we
E”ave. we’ve admitted we’ve corrected any number of these
excesses., and this is a t&end or wiping up operation that were
in now, IS it likely that the ‘re all goin to get into
we’d like to see them? I d on’t know t t e answer. f-O!“” don t know
ldcke
how the secondary/primary diehotom is going to be resolved.
But I am not going to over-react to d e negatrves. I will go on
patterns and values as I interpret them.
In answer to the question, soft or hard landing, I feel that it

45 - Reprinted from the Wall Street Transcript

 will be a soft landingif we haven’t already lauded.
DUAL TRENDS
J and then decidethat they ought to becomemarket timers after
1 1974 1975 1 1977 j 197
ChrtII
TWST: Don?
Mr. H&II: I’d like to res nd to that, becausewe can all sit
here and say what we sr ould do in the market now. Since
secondarystocks are doin well now, and large capitalizations
might do well later, all you5 ave to do is shift at the proper time
from oneareato the other andbackandforth. So
canstill do well although there is not a broadmartYpL et tren“di%!
fact of the matter is you can’t. The fact of the matter is that.
with ractically no exce tion, majorinstitutional investorshave
not 2 one well over the is t 10 or 15 years. Because nobody is
smart enough to make these shfi - into secondariesat the
right time and out of secondariesat the ri ht time and into this
and into the other thing. The point is that B. m fact, that is what
you are lookingfor, that if you are goingto continueto have dual
markets, you are not going to get satisfactory equity
formanceover a long-term period. relative to what you can get
from bonds.In other words, we are goingto continueto have a
pattern where most institutions (11underperform the market
averagesand (21underperform what you can get out of fixed
incomeinvestments.Not until you get a broadrise in the stock
market will most uitiesoutperform fixed incomeinvestments.
And I don’t see@ia t t potential until after a major decline in
interest rates. It’s all ve well to talk in this academicvein
about a dual market and p% ying oneagainstthe other, etc, etc.
But the fact is uobodyhasbeenable to do it consistently.I don’t
think anybody is quite that smart To achieve outstanding
results in the equit market over an prolongedperiodof time
you need the win h.l at your back. 9 ou need a broad primary
advanceof sustainableproportions. You haven’t had onesince
the early 1980’sand you’re not oing to get one until interest
rates comedown substantiall J. fou*re not going toget it from
trading into groupeandout o groups and into sectorsandout of
sectors.If you were able to do this, somebodywould have done
it. I don’t seethat they have, and we measuremost of the in-
stitution’s performances.
To answerDave’squestion,I think it’s got to bea hard landing.
I rather suspectyou will get this hard landingin a periodwhen
all the things that we’re talkin about come into gear. In late
1974interest rates were falling & e a rock. Yet. sowasthe stock
market. We all sat around waiting for interest rates to fall,
knowin that that wasthe key, andwhenthe started to fall - lo
and bef old. the stock market fell also an8. it weakenedour
resolve. I suspect that we’ll see something like that again
Reprinted from the Wail Street Transcript
Interest rates will, in fact. eventuall decline.businesswill be
terriple, inflation will be coming Bown, but somehowcon-
ventional wisdom will have conjured up reasonswhy you
shouldn’tbe buying equities.Yes, it will bea hard landing.
To go to Alan’s question.at least as I understandit, this 3
stocks versus the other 450 question - if YOUdon’t have
sustainable market rises in General Mot&s. American
Telephone and IBM, you can forget about uitv performance
relative to fried income securities. General %-. otors is the Big
Daddy. of the cyclicals, Teie@orre is the Big Caddy of the
*O defensivestocks.IBM is the Big Daddy of the growth stocks. It
SO goes back to what I was saying earlier. Not any of us, collec-
tlvely or individually, are smart enoughto move money in and
50 out of grou s effectively if we don’t have the wind at our back.
$0 If, the wm8 ISat our back in the c clicals.defensiveand owth
stocks, it hasto bereflected in GLd , Telephone and IBM. z?o Alan
30 if your interpretation of IBM isaccurate,I think that we havean
!O even worsestock market aheadof usthan I would have thought
otherwise.
10 TWST: Walt?
IO Mr. Deemer: I find it interestin that when techniciansstart
askin eachother the questions,t t all stirred up here.
IO Daviif- 9 possiblythe mildest so we’ve got four
lo moresingersto go.
It seemsto me that in every bear market. in the early stages
17 ‘0 peoplecrys,tallixe into two camps,somein the have not camp
and some m the have. The peo@e that are making money
throughout the bear market sav. ‘Just be in the ri t stocks,
don’t worry about the market.” This time the rigRh t place is
secondary stocks. In 19’73it wasgrowth stocks.In 196Uit was
somespeculativestocksthat now have beenforgotten because
they don’t exist anymore.In 1966it wasairlines.In 1962there
were somefood stocksand the like that held up right to the end.
So the point is that the fact that onearea of the market is still
holding up is typical of an early phaseof the bear market.
Eventuall , the peoplewho say that if I am only investedin the
right st& I will do all right, get a correction in their sector
au
I think that’s the risk and I would agree with Don that the
‘correctionin secondarystockscouldbe short but sweet,say. 25
or 30 percent in a relatively short time. Whether it endsin a
hard landing or a soft landing. I don’t know. But traditionally
ou get one of the two. The hard landing, blood in the streets,
ii.ig oversold,stocksare plummetingbut we don’t careanymore.
Bottom is fine.
The other, and I’ll take that too, is a very dull period like 1949
for example.I don’t particularly care which but I prefer oneor
the other.
TWST: Dou?
e. H&u: Walt, even in 1949, there was a general
disillusionment with stocks. even though there wasn’t the
throwing them overboard mentality we saw in 1962.1970and
1974.
TWST: David, bow de you react to your own
per- Mr. Upabaw:I’m of the hard landing school.
pretty closeto Don’s,20 percent or thereabouts.Spe
terms of th Indicator Digest you comeout to about the same.
That index has come from rou hly 20.5. December1974, to
about46.5, the other day. A thu2 of that 26 pointswould et the
IDA to the hi h 30sor about a 20 percent correction, wtfich by
no meanswouf d be considereda bear market. But I think that
kind of correction in the mass.ofsto+ will give technicians
;hzfiiooked-for oversoldcondition. I thmk that would be what
TWSi: W~wbatgpstio~rouidp&irwa?
k, &amer: We’d * e to view things positively at Putnam, so
I amfondof telling our portfolio managersthat a bear market is
an op unity to adlust your portfolios for the next bull
markep”-. With that in mmd,what wouldyou gentlemenadviseus
as to which groupsor stocksor sectorsyou want to be in over
the next bull c de, say over the next three to five years.
&~r.xb&: dlt. I uuessI’ve answeredthat. It would be those
stocksconsideredvalid growth stocksand issuesthought of as
of=emerpwy. wth stocks.
. I think the value is there. Allwe
need now u1a eclme III interest rates and inflation. Thus, I
would buy the best comnanies.
TWST: A?
Mr. Sluw: I think l’ve pretty muchcovered it before too. I’d
like to emphasizethat I believewe’re seeinga signnilicant turn in
the airline sector. and I would like to be itioned in this group
with the~expectationthat we were to R”ave a fairly decent up
c cle in the next three years.
;Kv ST: Dave?
46 -
 .%. Upehar: I think we all retty much covered it in the
dszus~n. The group that f_ named I think still are tmg etEix
owth. The list I named before mcluded cosmetics.
drum. o.f?ice equipment. Although in my work I can say some
for the chermcals on the cyclical side. They
5 ~‘:ys~~~ k!i%sin any particular “eeon-hole” but the XYC
bank stocks, I think, are interesting a
Mr. Deane: I think we have witnessed a secular reversal in
breadth. In other words. whereas. the breadth index has un
Mr. Shea: Dick, could I add a question to the panel Do any
members of this group have any fears about the maintenance of
yet another c cle iu the growth acceptance and utilization of
technical ana r.ysu as an investment tool, especially in the
professional circles? Whether or not this should be a concern
relative to other modes of investment or teehni ue. Bill Deane’s
recent article concerning the growth of m 3 ex funds is a
reference. He referred to the growth of dollar averagin and
formula investing that occurred at a time when everyone tlrew
in the towel on other investment type techniques, after the
1929-32 experience. I am just curious whether any of the
panelists share with me a degree of concern that the market, in
Its own way, will humble us. Whether or not we might be
witnessin some of that evidence now?
TWST: %iU?
Mr. Dome: I am quite concerned. I think this past month or
two has hurt our ima e-the image of our rofeeeion. I think if
one is to go back to I43 rch 39th or April 1Bth and read some of
the comments and then to have the market explode on the
upside in the manner in which it did. it undoubtedly has mud-
dled the water and hurt us as a group.
I admit that the influence of the technician has increased
during 1975-78-77 simply because the years 19’73 and 1974 were
so devastating for the other side of,the,street : the fuudameutal
ts iotpak our Market Techmcmne A+o+oon is workmg
acrease the image of, the recognition of, and the ac-
ceptance of technical ad sic in the efee of the investment
fraternity. A few ooor CAL canbeaccepted.Itiedifflcultto
accept, however, the heightened degree-of conviction that is
normally expressed the further prices go in one direction.
TWST: Dw?
Mr. Helm: I think market timin is higher now as a profession
and the esteem of investors t f an tt s ever been. Not just
because the fundamental side has had so many problems, but also
because of the caliber of ple that have come into the technical
side of the business. R”ot the least of which are my four
associatee here. I disagree with BiIL I don’t see any setback in
the profession in the last month or two, because the fun-
damental side of the Street didn’t see the rally comin either. I..
fact, by definition. if it’s a false rally most mar &et timers
wouldn t see it coming anyway.
I think the only threat to the increased esteem of market
timers, will come the next time a sustained broad-based bull
outstandin . And it’s getting better all the time.
TWST: &a?
Mr. Shew: What Don is saying is that when the patient gets
w$;e dh$$ anal no longer be needed.
: .
Mr. Cpehaw: I have a feelin partly borne out by my ona
experience and partly by ta &a s to my aseociates, and it
touches on something Bill Doane mentioned. Interest in what
we’re doingis primarily a function of big bad bear market. When
the bear market recedes all the eople who were slaughtered in
it think, “If only Id had a mar l! et tuner to get me out of it, I
wouldn’t have suffered this agony. “The truth is we probably
would have suffered the agony anyway because it’s one thing to
have a great market timer and somethinx else to believe bun.
next tinie around timers will be more worth listening to.
.Mr. Deema: I think people look at market timinn at too
simplistic a level. I know of at least eight people o&side of
Putnam that caught this rally. They were bearmh. had been
bearish and turned bullish on a timelv basis. This includes
dT services as well as other mark& analysts. People look
for mar et timers as people to ring a bell when it’s time to buy
and then blow a horn when it’s time to sell, but it just isn’t that
easy. They’re tryiug to subetitute “market timing’ for thinking.
My one and only law of stock market analysis is that nobody is
right all the time. When we bring in people on the other side of
the Street to talk to us, we’re not going to crucify them if we’re
wrong. We expect it sometime. Ifthey’re never-wrong, they’re
not human. But if they can contribute to our overall analysis of
rev& tbe economic data or somethinglike that. and& far-as I
know, the Dow Jones avera has never been seasonally ad-
‘u&d for a cold wiuter, and %fnz like that. The point being that
1 thmk market analysis and market timing is a very useful tool
when it is used with the di ‘ty that it deserves. When
somebody tries to treat it ae a sY art cut where all they have to
do is read one guy or one letter for two minutes a week or a
month or whatever and know everything there is about market
years have been more interested in the bottom line. rather than
diiiplinee involved in gettin there. I had an experiencejust
over the last five months. 4 e turned a little more positive
toward the market in the latter part of the year and found that
within a week, based upon the function of rice more than
anything else. we were premature or wrong. I+ ehadtorecalla
nuinber-of people. Some were critical so I-made a int of ex-
plaiaia~ the reasons behind the two decisions. The caeo may have
been m&e educational as a result.
TWST: Wally?
Mr. Doemor: I’d llke to go back to the indicators I cited at
the beginning of this discussion wl$ch I would lie meet to know
where they will be six months from now. One was Treasury
bond yields, one was the prime rate and the third wae whether
we were in a recession or not and if so. how long we’d been in it
and how far we were from the trough. And these are very
simple requests for information from other areas that an awful
lot of time and study has been spent on. but when you look at
the records of people tryin to predict things like interest rates
and inflation ra+zs and w hether we’re in a recession or when
we’re going into one. their records aren’t all that super in my
o iniou. They have work to do too.
b ST:Bi&eqneedenforthepeaeI?
’ Mr. Deere: I do have one question. Su pose the market reacta
or declines to say, 780, in the Fall mont \ e, and then. some time
47 -
Reprinted from the Wall Street Transcrzpt
 in 1979, works on up to 900.950. and eventually clears the 1000
hurdle in a d&cisive manner. Wouldn’t we (we meaning our
rofessionl look rather foolish for having been so negative at DJ
P427 Isn’t it possible that, b hindsight, we may have placed too
much emphasis on some m 2 icators and not enough emphasis on
others?
Mr. Deemer: I think I would look back and say that I severely
underestimated the durability and staying power of recoveries
in the secondary stocks and their abtity to hold up durin a
correction of the heavily-weighted minority of stocks, also t5 e
fact that seconda stocks ot so washed out from 1968 to 1974
that theJ were ab 7 e to wit4 stand the correction in the heavily
weighte stocks with no severe decline at ah.
Mr. Hahn: What’s the question, I just caughtthe endof it?
Mr. Deene: Well, I was ‘ust thinking out loud. But let me
repeat the thought. What u! by hindsight,we lookbackand say
, that wasa bottom of importanceat DJ 742”and,insteadoi
the bottom. interest rates and inflation rates stabilized
erated after the fact. this a oqssihiht~and, if so,
pretty foohshtor avlng been
so onesided at t
Mr. Hsha: I think it’s a possibility, but I want to go back to
Walt’s point. What I really think the value of a market timer is
to explain to pie the oddsof the market bottoming before
interest ratesc ttoom.the market bottoming beforeyou have a
major se ent of the market corrected, that you are playin
short od8Y s. Anybody who’s responsiblein this businesswd
alwa s, I think, leave himself enough daylight to say that
anyt6mg is possible,but I think you perform your servicewhen
you go to our clients and say. here’s the empericalhistorical
evidence.Accordingly, if you are bettin that the market has
bottomed before interest rates have to ttomed if you are
betting that the market hasbottomedbeforea ms’orelementof
the market hascorrected, if you are betting that tAe msrket has
bottomed when noneof the sentimentindicators have reached
bullish levels you have performedthe service you are su posed
to erform. You have exposedhim to what he is doing. 8 e may
stii make the bet and he may want to fly in the face of those
odds, but I think Walt’s point is that you must still sa em-
perically, and in a disci lined manner,here are the oddsLed
on historical evidence.i! nd so,yes, it’s a possibilityBill but even
if it hap ned. I would still say that thoseof us who, as market
timers, r ave srud that we didn t think it wouldhappenhave still
fulfilled our function.
Mr. Doaae:This seemssimilar to the sayingthat the operation
the market was
who’s been right for a long, long time.
TWST: Den?
Mr. H&n: In limewith Dave’s point. several years ago I was
approachedin anairnort by the financialvice-presidentof oneof
tzkpaTt institutions $ the country who had just heard me
h. He sad. Don, I want to tell you that I’m oneof
thosefe 1p””
owswho hssnever had any usefor market timing and
still don’t, but I’ve beenreadingyour work andlisteningto your
tapes for five years, and I want to tell YOUthat if you can call it
- 48
Reprinted from the Wall Street Transcript
_ ~~~~-~~ - ~~~
that well for the next five ears, I’m a believer.” After ten
years, hewasgoin to be a be ‘ever’
Mr. Upshaw:I’d &ce to thr!w in another true star koidby a
associate.He told mea coupleof years agothat oneo his chents
said, “Yqu’re running mecrazy.” And the guy happenedto be in
one of his nght periods.sohe couldn’t figure out why the client
was ticked off. ’ What have I done?I’ve beenprettv right the -
last two or three times around.” His client said, “That’s the
point..I’ve got you and two others, I read three of vou guvs and
every cycle, one of the three of you is ri ht asram. One-ofYOU
callsthe top, oneof you callsthe bottom ?Iut what’srunning-me
crazy is the gut is nzver the samepy., andI dpn’t know how to
pick from the t ree. So I would SLe with Donm that reai value
is not cailin a client and saying “Today’s a top, sell” or “Todav
is a bottom,%uy.” but it’s saying, “Here’sthe situationasI seeIt
and here’swhat I think the odds are of this or that happening. -
You make your own bets but here’sthe possibilitiesI’m trying
to help you develop.” I think that’s muchmore important than
tryin to call the top or bottom day even thoughit’s great when
you I o it. But I wonder really how valuable it is m the last
analysis becauseof this secondguessingand hindsight factor
that the client invariabl brings to bear on it. As Don said,“If
you’re right for anotherp:ive years, I’ll be a believer.”
TWST: Welt?
Mr. Deemer: The dilemmaI am up atzainstis that of the eight -
peoplethat I mentionedearlier who called this bottom (again.
the criteria were that they were bearishhad been correctly
bearish, and turned bullish in a timely fashion)four of them
assureme it’s a bull market and the other four are assuringme
that it’s a bear market rally and we’re seineto see lower lows-
and someof them think we’re going ti o”to lower lows fairly
quick1 . Obviously half of themewillbe rig4 t. Which half7
TWSi: Den. YOUlasvea qnestmnfor the paneI?
lrrls77
,Mr. Hahn: I-do Dick. We alwavs get asked by peoplefrom
academia,and fundamentalists,how do we know that what
we’re domg has value. We publish every year, basedon our
ure and our list of attractive industries, how we
S&P and to the four thousand~plusl
our FundsEvaluation division. So we
have a concrete, tangible example of how, if you foilowed us
right to the letter, you would have performed againstthe S&P
-
 and four thousand funds. Therefore, we do have a way of mea-
surin value add+. But I wouid like to ask the ocher panelists,
h;LS; 3 tzve” it?
Mr. U&haw:‘Well tell us a little more - I want a little more on
the uestion side. I’ll try to take a crack at it, but how do you
buil 2 vour record?
Mr. kahn: At the start of every month, Dave. we recommend
equity exposure. At that time, our computer. assuming we’re
recommendine 3Q oercent eauitv exposure, would register 30
ercent in s&ks ‘divided oquallv imong the attraztive in-
% ustnes. The other 70 nercent would be invested in T-bills. This
record has been accumuiated from the start of 1969.
Mr. Upshaw: What I try to get paid for is heioinz people to
think for themselves. That’s very hard to uancify. Buy my
policv is, and m own feeling about ciients on tB e buy side is that
they’re not re J ly looking so much for edicts hurled down from
Mt. Olympus as to what the must do but for things that help
them make their decisions. i try to help them do the job that
way by giving them things to think atjout and not by telling
them what they should do. You have, I think, a unique way to be
measured, be&use of -your -.
grasp on the fundamentalists you
work with.
TWST: Alan?
Mr. Straw: I auess Td fall in line with what David had to say. I
do function oii m firm’s investment policy committee. It% a
diverse group. B ur chairman takes care of the economic
overview. Then we have our portfolio strategist. our director of
research, our director of fixed income and monetary policy and
rotational members from research. I’m obviously a minority
voice. We do not have a quantified method as Don. to say d
you’d followed what has been manufactured from our particular
school of thought or as combined with fundamental or economic
- thinking, that this is the way you would have performed. IL’S
become a very harsh business in this respect On the in-
stitutional end, I ess we’re all measured these days by what
are called votes. F he worth of our input, or the value added
aspect, can also be measured by relationships that you’re able to
imtiate and maintain over time. Of course, we’re all involved in
different functions as welL We must also relate to. as David
does as well, our entire retail sales force.
TWST: Bill?
Mr. Doene: WelL as much as noesible. we at Fidelity have
attempted to quantify our opinions. One report that we have
distributed ever since 19’70 on a twice a morith basis selects 23
large capitalized companies and 25 smaller capitalized com-
panies that we feel possess favorable technical characteristics
and represent attractive levels for accumulation. We plug those
stock symbols into a computer terminal as if each were a paper
portfolio. Each report is then evaluated six months later 111
absolute and relative terms. We do have a good long-term
performance record on that particular re
Industrv evaluations are not as we fi- organized. Industry
recommendations are published on an irregular basis -- when
the timing is anoronriate. We measure these vs. the S&P “%lo”
Cornposit; as” will as against the performance of the
re resentative S & P industry group.
rQecently. there has been a movement underway in our fum to
computerme all fundamental and technical recommendations so
that all areas of research are evaluated in much the same
manner as the portfolio manager.
TWST: Wdt?
Mr. Deemer: I think I have sort of an intangible impact,
myself. I think very simply my job is to try to earn the votes of a
captive audience. I can’t go to Fidelity and try to get their votes.
and I can’t o to a brokera house and try to get votes. On the
other hand, gI must go to fifourmonevmanagersandanal~~
and key administrative personnel and try to influence t eir
opinion. I can do that in a number of ways but basically what I
am constantly trying to do is search for the best market analysts
with the best inputs and circulate them along side of my own.
We have.memos‘$ in f out all the time with-little nug -ets of
information that fin . For examele. we rewntlv did a c4l art of
the percentage of pension fund assets invested iri equities going
back to 1946 which show a Ion uptrend from about 8 percent in
:Edun to the 1973 peak of %.S and then the reversal of that
put UI my own conclusion, sure, but I also gave our
people some evidence that they didn’t previous1 have; rnyt
charts of equity percentages in pension funds that F ve yse;toru;
go back to 1960 and the trough on them was not 8
somewhere above the 40 percent IeveL This might p”ead people
to a much different conclusion. It’s all an attempt to heip peo le
come to a more intelligent decision than they otherwise w dd.
- 49
And however I do that - on my own. or using outside sources, if
I can help our money managers do a better job with me than
wtthout me, then I’m doing my job. If I really do my job well,
much of the time they wont know it’s me helping them, It will
be such a natural part of their de&on-making process.
TWST: I have P last question. two parts. And Alan well stsrt
with you. Number one. where do you see yourself taking the
most contrary view to any perceptfen that is currently cir-
culating on the Street relating to the mukei? And secondly, any
estimate that you anticipate for the Dow Jonee Aver e on
three days, June 30.19’78, December 31.1978 sod June 30.Y !?
Hr. Shaw: I can answer the second one easiest b refusing to.
It’s usually iutile to try and make such guesses. ! think a con-
troversial viewpoint to take now would be that the weighted
market has made a major bottom. and there will not be a
significant pullback at this juncture. A reaction would be a
normal expectation, but that cash out there will become su
nervous and force the market to enjoy a sizeable advance. xt
instead of seeing 940. 950 as Bill su gested in 1979, we’ll see it
within the next few months. I woul % have to euess that there
would be the most controversial posture to takye’at this point.
TWST: Iha?
Mr. ~&ha: I think the most controversial thin I’m saying now
is that there is a secular closing of the yiel d gap underway.
When we look back and see that common stocks ylelded 3 to 5
percent less than bonds. we’ll view that as a very unique period
m the stock market. Now we are on the way back to where
bonds and stocks yield substantially closer amounts than they
have over the previous ten years. To answer yr-J question
about the Dow at various times, assuming the Dow closed today
at 825. I would say it would be lower on June 30.78. It will be
lower than 825 on December 31.1978. It will be higher than 825
oqdlm; 3&$9.
Mr. U&uw: i want to understand the uestion. I think I heard
two ways of answering. Did you ask **Aat are you personally
saying that’s the mast controversial?” or “What is the most
controversail view one could espouse?”
TWST: Where do you thbk yea have a po&h th& ir moot
wntruytaauymimtre M?
Mr. Upshaw: Alan. did you? answer it that way? You’re not
,,hat,,sad.areyo~ ..
haw: o, I took the uestron as being what would be a
very controversial stance a this pomt.
TWST:WelLwlutuezcetithatfbatauoundtheStreetdo
you mod violently dijeet ti?
,Mr. SJuw: That prices are going to go substantially lower in
magnitude. to 600,oOO or whatever.
.Mr. Upsbsw: And my crack at that question. now that I’m sure
that I understand it. is that I think It’s rather hard to be con-
troversial because o-pinions are SO polarized. Way back at thr
start of this conversation, I mentioned I don’t know anybody
who’s than All the rally has done is just solidify opinions
that were aPready there. The bulls are more than ever sure that
they are right and the bears are adamantly sure that what
we’ve seen IS a mere big bear market rally that will be followed
by new lows. If you’re m one camp. you’re controversial to the
other side, but it’s hard to be controversial with these two
tremendous. camC of p$arized opy out there. I’ve taken a
moderate view t t I t mk the rall on a short term basm has
done about what it’s going to do an that the market is goin tc
consolidate for the next several months. The bottom of t%a t
consolidation, I think, could be somewhere between 810 to 789.
I’m not convmced that we’ve seen a major bear market bottom,
but I am not comfortable with the assumption that we’re goin
to plunge through 742 and go to new lows. That’s what I th ill!
the summertime in this market is going to be about, as the
market tries to decide in this quieter period whether the en-
thusiasm that jumped it from 742 to 830 was really justified or
not.
TWST: Walt?
Mr. Deemer: I’ll give you two, the most contrary and the most
controversiaL The most contrary opinion I can come up with is
that the secondary stocks are gong to crack while the big
wei hted stocks go up makm everybody wrong. How this
wou 4 d happen I don’t know, but f ponder whether it s going to or
not. That would be the most contrary.
The most controversial would be that this is a bear market
Tally that could easily develo similar confi rations in Lowry’s
work to the bear market ra !i es of 1937. 1%-’53, 1969. 19’73 and
1974. along with the rally in 1939. the first five, of which were
followed by an immediate retracement of the yms., And, I think
that a straight line move from here to new ows 1s oulte con-
- Reprinted from the Wall Street Transcript
troversiaL I don’t know what the odds are but as Don Hahn most contrary, I guess it would have to be my belief that neither
mentioned. Fertainly there is a t precedent +d I think one inflation rates or interest rates currently represent an over-
h$;FBF the current mar R”et very closely m that regard. riding obstacle to higher stock prices.
Mr. D&te:‘Weil, in terms of my opinion as to what would be TWST: Gentlemen, thaok you very much.

Reprinted from the Wall Street Transcript - 50 -

 / REDISCOUNT RATE ;
Copyright 1978 @ Arthur A. .MerriU

(While this material is protected 3y copyright,

we do not object to quotation ti a name-and-
address credit line is included: Arthur A.
-Merrill, 30x 223, C’happaqua NY 10511)

/
/ ‘LL
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I - 0

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4

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- 52 -
Source: FINANCIAL ANALYSTS JOURNAL,
Reprinted with the permission of the
by Stan West and Thomas T. AMurphy
New Caveats in Relying on
Traditional Stock Market Statistics
) In the past few years. long-standing patterns and
practices in the securities business have altered
profoundly. In some cases, the significance of these
alterations for the interpretation of certain technical
indicators has probably passed unnoticed.
When the odd lot theory was formulated, for
example, odd lot statistics traditionally showed a
purchase balance. With the increase in split stock
dividends, mergers and dividend reinvestment plans,
huge amounts of odd lot shares have passed into the
hands of investors without ever showing up in odd lot
purchase statistics. As a result, only two of the last 17
years have shown purchase balances.
The pattern of member transactions is changing,
too. Over the last 40 years, purchases generally
equaled sales. Now, with certain specialist firms
handling odd lots. purchases no longer equal sales.
When customers are consistently selling on balance
(as they have been since 1970). these firms
accumulate vast amounts of odd lot shares, which they
divest by selling in round lots. One can use specialists’
TATISTICAL indicators are the lifeblood-
S or at least the daily vitamin supply-of
stock market. Almost any idea or concept, no
matter how farfetched or seemingly ludicrous, will
the
attract at least a small follow-in& so long as it’s statis-
tically measurable. One suspects that Aunt Martha’s
rheumatism and Uncle Harry’s gout have not passed
unnoticed in the search for clues to the market; and
some cynics, looking at the results, may say too
much attention is being given to Aunt Martha.
A good-sized segment of the securities indusuy is
devoted to the analysis of technical indicators. Every
technician is familiar with the smorgasbord of
theories -the Elliot wave, the Dow theory and its
many variations, point and figures, stock market
credit, bank credit, confidence index, contrary opin-
ion, odd-lot theory, short sales and short interest,
and the more colorful ones such as sun-spot cycies,
the length of women’s hemlines and, one of the
- 53
September-October 1978
FINANCIAL ANALYSTS JOURNAL
odd lot statistics 10 estimate the contribution of these
offsets to member transactions.
Interpretation of short sale statistics is now
complicated by the magnitude of off-floor member
short sales, which is approaching that of specialists,
and by the introduction of put options. which have
drained away a great deal of what would normally have
been short seiling by member firms. And. whereas the
technician could previously make fairly safe use of
changes in margin debt to gauge the market activity of
margin traders, he must now exercise caution.
Between the spring of 1976 and the fall of 1977,
customers used margin accounts 10 borrow cash for
purposes other than buying or trading securities for
credit. Only time will tell whether this development will
turn out to be a permanent distorting element in the
interpretation of margin debt.
Where his pet numbers are concerned, the
watchword for the technical analyst has to be eternal
vigilance. t
latest, major-league batting averages. Such theories
have been developed and their techniques honed to
the finest point imaginable in order to provide an
advance inkling of the course of stock prices.
But times and people change; and so do institu-
tions, technology, philosophies of governments,
public attitude-s and the balance of world power.
Sum Wrsr is Vice President of BusinessRrseorch for
the New York Stock Exchange. Thomas Murphy is a
Research Associate in the Exchange’s BusinessRe-
search Department, and edits rhe NYSE Fact Book.
Alrhough most of the authors’ conclusions result
from their work as NYSE staff members,the views ex-
pressedin this article are not necessarily (hoseof the
NYSE. Nor should rhey be construed as expressinga
preference or opinion on the part of the aurhors in
relation 10 any particular statistical indicator or its
validity; they are intended to be informative, not argu-
mentative.
-
Last year’s sure-shot technique may soon go the way
of the railroad freight carloadings or hog-corn cycle
that served so well an earlier generation of analysts.
It is a bread and butter matter for analysts to be
familiar with changes that may affect the indicators
they use in their daily work.
In the past few years, profound alterations in the
structure of the securities industry-and indeed in
the national and world economies-have altered the
long-standing patterns of doing business in securities
and, as a consequence, led to changes in the re-
porting of that business. The Consolidated Tape, for
example, has transformed the familiar stock tables
and confused more than a few. Over-the-counter
transactions in listed stocks appear on a ticker tape.
Transactions of 100 shares or fewer have become a
miniiule part of activity.
Nor is the end in sight. The next few years will
almost certainly see further metamorphosis in the
way stocks are traded and in the statistical by-prod-
ucts of those transactions. Unless they become aware
of factors that may be undermining once-familiar
data, some analysts may actually be led astray in
their interpretations.
This article offers to the present generation of
analysts insiits into recent (and possible future) de-
velopments that may affect the interpretation of sev-
eral favorite technical indicators. In most cases,
these developments reflect significant structural
changes in the securities industry, whose statistical
impact may have passed unnoticed. The article also
aims to correct several misconceptions surroundii
the various long-standing New York Stock Ex-
change statistical series.
Odd Lots
A major change has occurred in the handling and
reporting of odd lots (transactions involving fewer
than 100shares,orfewe~than 10shareswherethe
traclii unit is 10 shares). Historically, the role of
dealing in customers’ odd lots-i.e., buying from
and sellmg to the public directly-was concentrated
in a few firms, although actually any member firm
could have acted as dealer for its customers’ odd-lot
orders. In the 1930’s, the business was dominated by
three houses, with a few specialist firms handling less
than one per cent of the total. By 1975, only one
fum (the result of successive mergers of the original
three) was dealing in odd lots and on May 2 1,1976,
that firm ceased operations. Specialists immediately
assumed the responsibility of dealing in odd lots of
the stocks in which they were registered. A few
months earlier, in January 1976, Merrill Lynch,
Pierce, Fenner & Smith, Inc., had begun dealing in
odd lots; subsequently, Dean Witter & Co. Inc.
(August 1976), Pershing & Co. Inc. (April 1977)
FINANCIAL
and Bathe Halsey Stuart Shields Inc. (November
1977) joined the ranks of “upstairs odd-lot
dealers”1 This is merely a foretaste of what the
analyst may have to contend with if NYSE Rule 390
is eliminated by the SEC, and upstairs market-mak-
ing spreads to round-lot orders.
When the one, two or three dealer firms were han-
dling all the odd lots, their daily reports pretty much
encompassed the universe of odd-lot trading. As of
now, only the specialist firms report odd-lot dealings
daily, through the Securities Industry Automation
Corporation (SIAC). Their statistics appear on the
Dow Jones and Reuters broad tapes the following
morning, and in the newspapers the day alter that.
The non-specialist tirms report only weekly, and a
summary for the week-combining specialist and
non-specialist activity- is printed (with a two-week
lag) on the broad tapes late Friday and in Monday’s
Wall Street Journal and Barron’s.
The SEC Statistical Bulletin published daily
odd-lot data for all major stock exchanges until Feb-
rusty 1978. The SEC data differed from the NYSE’s
by including the transactions of NYSE non-special-
ist member firms in the Third Market column. (The
sole reporting Third Market dealer in NYSE-listed
odd lots accounted for less than two per cent of odd-
lot volume on the NYSE, according to SEC statis-
tics.) The SEC table also omitted short sales in odd
lots. Only the public sells short in odd lots; NYSE
members rarely do. Customers’ short sales data may
be found in the newspapers daily, in The Wall
Street Journal Weekly and in the NYSE’s publica-
tion, Statistical Highlights, monthly.
Odd-Lot Trading
To the misinformed, the odd-lot theory asserts
that “the odd-lotter is always wrong.” To the techni-
cian, this is nonsense. To him the theory-in its
simplest form-says that at peaks in the stock price
cycle, odd-lot statistics show a very heavy purchase
balance; conversely, at the bottom of the price cycle,
they show a substantial sale balance. This theory was
formulated at a time when a pumhase balance-
daily, monthly or annually-was the “normal” pat-
tern. In the early 1960’s, the normal pattern shifted
to a sale balance, except for scatmmd periods. In the
past 17 years (1961 to 1977), only two years showed
purchase balances. By contrast, of the previous 41
years(192Oto 196O),onlysevenhadsalebalances.
The shift to constant sale balances can be at-
tributed to factors other than investors’ negative sen-
timents about equities, a feeling that is well docu-
mented.Thesharpincreaseinthenumberofstock
splits and stock dividends that began in the late
I. Footnotes appear at end of article.
ANALYSTS JOURNAL I SEPTEMBER-OCTOBER 1979 - 54 -
 1950s and the enormous growth in the list have little access to the kind of inside information officers
placed in the hands of investors billions of shares in and directors have.
odd lots. For example, stock dividends of less than Statistics on member transactions, dating from
50 per cent in the 20 years from 1957 to 1976 have March 1936, cover purchases, long sales and short
added to investors’ holdings 880 million shares, sales. separately, by specialists and specialists’ firms,
probably mostly in odd lots; during this period the by members and member firms where the orders
cumulative odd-lot sale balance was 231 million originate on the floor and off the floor, and (until
shares. May 1976) by member firms dealing in odd lots.
While there exist many different ways of acquiring Warrants have been included since April 1970.
odd lots other than by purchasing them on the Members and member firms report their transac-
NYSE-inheritance, gifts, mergers, pre-listing pur-tions to the NYSE Business Research Department
chases-the principal method of disposing of them weekly; the latter releases aggmgam statistics on Fri-
is sellii on the Exchange. With the increase in the days to the Dow Jones and Reuters news tapes.
lii, in splits, stock dividends, mergers, dividend re- Monday’s Wall Street Journal publishes the sum-
investment plans, employee participation plans, etc. mary. (Until February 1978, the SEC Statistical
huge amounts of shares in odd lots have passed into Bulletin carried daily data on member trading)
the hands of investors withour ever having shown Over the 40 years members have been repotting
up in the odd-lot purchase statistics.’ transactions, purchases have generally equaled sales
The advent of automated tradiig systems on for specialists and on-floor traders. Specialists’ big-
regional exchanges has also affected odd-lot statis- gest balance on either side was an excess of sales of
tics. An unknown amount of odd-lot activity in about four million shares in 1973, on transactions of
NYSE-listed stocks is being executed in other 1,176 million shares. On-floor balances have been
markets. For example, in 1977 an estimated 30 per similarly small. Off-floor transactions, until 1971,
cent of Pacific Stock Exchange transactions were were usually in a sale balance status; but from Janu-
odd-lot executions through its COMEX system The ary 1972 to December !975, purchases predomi-
Philadelphia Stock Exchange’s PACE system is re- nated.
portedly executing about 250 odd-lot orders per Prior to May 21, 1976, speciaIis&s handled only
day. For regional exchanges to handle odd-lot busi- round-lot transactions of stocks in which they were
ness is in itself not unusual; this has been the case forregismed, and the data they reported-reflecting
decades. What is new is that the automated systems their activity solely as specialists in round lots-
have attracted a growing volume to those exchanges, were fairly straight-forward and uncomplicated.
further eroding activity on the NYSE by small inves- After the demise of the principal member firm odd-
tors, hence the completeness of odd-lot statistical lot dealer, however, specialists began handling odd
data based solely on NYSE activity. lots too, and by the end of 1977, four “upstairs’*
To what degree these factors have diluted or ne- member firms had joined them in this activity.
gated the theory, and what adjustments can reason- The involvement of specialists, and other member
ably be made, are questions for the technicians to finrrshandlingoddlots,intheprocessofwhatis
decide. While an attempt has been made to adjust known as ofBetting round lots has significantly
the theory to the new pattern, agreement on the affected the specialii’ balance. When public cus-
validity of the adjustment has not been as wide- tomers buy or sell odd lots on balance over a pro-
spread as was the acceptance of the original theory tracted period of time, dealers tmnsac&g in odd lots
in its day. must acquire or dispose of large quantities of odd-lot
shares. If customers are, on balance, selling consis-
NYSE Member Transactions tently (as they have for every month, save one, since
Technical analysis built around New York Stock August 1970), dealers accumulate a vast amount of
Exchange member transactions seems to loom large odd-lot shares, which they, in turn, divest by selling
in popularity among some elements of the investing in round lots (because of the dearth of eager odd-lot
commuity. NYSE member transactions are delined buyers). These inventory adjustmen& or offsetting
as any round-lot purchase or sale of stocks and war- transactions, are included in the specialists’ weekly
rants effected on the floor of the NYSE for the ac- report of round-lot transactions as specialists. The
count of NYSE members, allied members and mem- round-lot of&s of non-specialist firms acting as
ber firms. These transactions are sometimes mis- odd-lot dealers are included under “initiated off the
takenly referred to as “insider” tradiig, a term more floor” in the SEC reponing form, and under
legitimately applied to transactions of officers, diiec- “others” in the NYSE press release.
tors and large stockholders of corporations. Most Immediiely a& becoming odd-lot dealers, spe-
NYSE members-particularly specialists- have cialists began to report a consistent sale balance in

- jj _ ~~NANOIAL ANALYSTS JOURNAL ! smmm+oc-ro~ER 1978

 --

their monthly round-lot transactions. So, too, did TABLE 1: The Odd-Lot Impact
off-floor member firms, but their reports include off- Round-Lot Shams Odd-Lot sham
setsonly for the four dealers in odd lots. MNnbwNetsaks Public Nol Sales
Current statisticsdo not isolate offsetting round- Specialists -25,564,OOO -33,924.OOO
lot transactions; they are included with figures for Off-Floor Members -26,308,OOO - 8,632.OOO
the other functions of the dealers. However, such -51,872.OOO -42,556,OOO
transactionscan be estimatedfrom the daily odd-lot
figures, which apply to specialistsonly. Since it is
known that odd-lot dealer firms historically offset in introduced on exchangesin 1977, a trader may take
round lots almost the entire odd-lot saleor purchase advantage of falling prices without selling the stock
balance, monthly and annually (give or take a few short. Thii method requires a smaller investment
thousand shares),it is reasonableto assumethat spe- than shorting, and consequently provides greater
cialists, and off-floor fm, are now doing just leverage.
that-offsetting all the excessinventory. Thus, from Reporting of odd-lot activity has undergone sig-
the daily odd-lot statisticsfor specialists,one can ar- nificant change.From the beginn& odd-lot dealer
rive at the weekly or monthly odd-lot balance, sub- firms produced statistics for the public’s odd-lot
tract that from the weekly or monthly round-lot bal- short sales.Member firms did not normally sell odd-
ance for specialists,and thereby derive the approxi- lots short. Now that member firms handle their own
mate balance for their activity as round-lot special- odd lots, they do not separately report short sales
istsonly. In any event, analyzingthe investment de- and long salesin odd lots. (And, inasmuch as odd-
cisions reflected in members’round-lot transactions lot short salesare not subjectto the samerestrictions
has become diicult, and the results lesscertain. A as round-lot short sales,they have no compelling
rough attempt to account for the odd-lot impact in need to collect detailed statistics on the former.)
1977 yields some fascinating numbers, as Table 1 With four upstairs member f%rrnsnow handling
shows. about 30 per cent of odd-lot activity, the quality of
Members’ transactions originatiq off-floor as a reporting of odd-lot short selling has fallen drasti-
proportion of all member trading has been in- ally. In the last full year of the sole odd-lot dealer
creasingin recent years.In 1977, for the first year in (197S), odd-lot shorts amounted to 972,000 shares.
history, the aggregatevolume of off-floor members In 1976, the number fell 60 per cent,to 398,000, the
exceededthat of specialists.Tbii development un- lowest yearly total since 1956. In 1977, odd-lot
doubtedly reflects the growing role of block posi- shorts totaled 393,000-an average of 1,600 a day,
tioning firms in servicing the immediie needs of compared with 7,200 a day in 1975 and 11,000 a
their institutional accounts. day in 1966.
It is open to debate whether reported daiiy short
Short Sales salesinoddlotswilleveragainreachthedailyhigh
Analysts,forecastersand investors also utilize sta- of 43,000 sharesin 1970, or even the 16,000 share
tistics on short salesby member fums and by the high of 1974-both of which coincided with major
public. Publication of short salesdata beganin June market bottoms. Analystsmay be able to apply their
1939, and odd-lot short sales statisticsfollowed in own adjustment factors to the current level of re-
October. It is worth noting that the proportion of porting.
of%floor members’shorts is approaching that of spe-
cialists,and in some 1977 months actually exceeded Short Interest
it. As recently as 1975, the proportion of short sales Short interest statisticshave long been tbe candle
attributable to off-floor memberswas 24.7 per cent, flame to the moths of s&atisticalanalysis.Their long
versus S1.8 per centfor specialists.Undoubtedly, the history began in 1931, at a time when some critics
changed pattern reflects the growth in block-posi- were convinced that short selling was the major
tioning firms referred to earlier. causeof the 1929 Crash.
Member firms report round-lot short sales for The short interq or position, reflects the number
their own accounts,along with their purchasesand of sharessold short but not yet covered asof a given
long sales;round-lot short salesby the public are re- date.Datainaggregateandforeachlistedstockare
ported separately.The NYSE press releasecontains compiled for the sezttlementdate of the 15th of the
these stathim each Friday. While no changeshave month (or the 14th or 13th, if the 15th is a week-
taken place in the reporting of round-lot short sales end), reflecting the trade date for five clearing’da~
by member firms or by the public, the magnitude previous. These stat&ticsare releasedon the fourth
and significance of the figures may be affected by businessday after the 1Sth, but only large positions
trading in standard&d puts. By buying put options, or large changes in position are published by the

FINANCIAL ANALYSTS JOURNAL I SEPTEMBER-OCTOBER lQ7P - 56 -

 press. The uninitiated frequently confuse short sales
with short interest. No short sales data for individ-
ual issues are collected, or ever have been; short
sales are compiled according to type of trader-spe-
cialist, floor trader, public.
Short interest statistics and the concomitant short
interest-share volume ratio are often used to deter-
mine the bearish or bullish posture of the market or
of a stock. But technicians do not always agree on
their interpretation: While some look at a large short
interest as reflecting bearish sentiments, others insist
that such a large amount of borrowed stock must
some day return to supply demand in the market.
Short interest data have always had limited
analytical value. The release date, coming four busi-
ness days after the settlement date, which is five
clearing days after the trade date, makes the data as
published two weeks old. Furthermore the report
merely pinpoints the position outstanding as of one
particular day of the month, giving no information
about the situation immediately prior or subsequent
to the reporting date. Finally, the lack of data on
short sales by issue obscures the reasons behind
changes in short position-did the short position
decline because of a large amount of short selling
combined with an even larger amount of covering, or
because of a small amount of covering in the absence
of any short sales?
The development of standardized options trading
has distorted short interest data by distorting short
sales statistics. Put options do not show up in short
interest. As put techniques become more familiar
and the list of available puts expands, the usefulness
of short interest data may well be diminished.
The recent proliferation of tender offers, com-
peting tender offers and unsuccessful tender offers
has also complicated the technician’s analytical task.
Differences between market prices and tender prices
present to the sophistic&d trader and arbitrageur
opportunities to profit through options and short
selling from successful and unsucce&% tender
offers. Short selling on regional exchanges or at
over-the-counter brokerage houses (Third Market
firms), arbitraging in mergers or stock distributions
and selling short against convertible debentures and
preferred stocks (where conversion and delivery of
common stock can be made without resort to pur-
chasing in the market) can only make the interpreta-
tion of short interest statistics even more complex.
Securities Market Credit
The measurement of debt incurred by the public
and by broker/dealers in financing securities trans-
actions has had a long and varied history. Each new
measurement over the years represented an attempt
to reflect more accurately the impact of bank and
- 57 - FINANCIAL ANALYSTS JOURNAL I SEPTEMBER-OCTOBER
broker credit on the securities markets and the
banking system. From as far back as the 187Os,
various agencies and organizations-the Comp-
troller of the Currency, Federal Reserve Board, New
York Stock Exchange, Congressional committees-
have gathered data on credit extended on securities
collateral or to the securities industry-loans to
brokers and dealers for the purpose of purchasing
and carrying securities, secured loans, call loans,
purpose loans, stock market credit, members bor-
rowings, customers’ net debit balances and margin
debt. Curiously, the tendency in the stock market,
especially among old-timers, is to refer to any of
these series as “brokers’ loans.” Ironically, no stock
market credit series ever carried that particular title.
None of the statistical series, except perhaps
customers’ credit balances, allowed precise analysis
or provided useful insight about the impact of secu-
rities credit. For example, neither the FRB series,
Loans to Brokers and Dealers for Purchasing or
Carrying Securities. nor the NYSE series, Member
Borrowings, (both dating back to World War I) told
enough about what use was being made of the cred-
it-e.g., if it financed brokers’ trading purchases,
dealer inventories or underwriting; backed cus-
tomers’ purchases and short sales; or went for
“housekeeping’* uses.
An NYSE series, Customers’ Net Debit Balances
(CNDB), inaugurated in 193 1 (after the Crash, un-
fortunately), was serviceable enough except in those
periods when precise analysis was most needed-
very speculative periods, deepening bear markets
and soaring bull markets. But during the paperwork
crisis of the late 196Os, as share volume set new
highs and operations departments of member firms
fell behind in their record-keeping and clearance,
the CNDB series virtually broke down. From the
end of 1965 to the end of 1968, debit balances in-
creased by $6.1 billion, or 164 per cent, although in
the same period customers’ margin debt (measured
by a newly introduced series mentioned below) rose
by only 25 per cent. The major problem with CNDB
was that it included all kinds of accounts-margin
commodity, bond and, most notably, cash accounts.
Unfortunately temporary debits in cash accounts, as
ledger posting lagged by weeks or months in some
firms during the “back-office” crisis, caused the
huge bulge in CNDB. Since most analysts had right-
fully understood for years that CNDB consisted
mostly of stock margin debt, the data in the late ‘six-
ties became deceptive and misleading.
Fortunately, the NYSE had a new credit series
available concurrently with CNDB. From the late
195oS, the NYSE had been collecting (but not pub-
lishing) a variety of statistics on margin accounts
from a small sample of member firms. These data
1978
were used not only by the Exchange in its regulatory kers, which is related to the prime rate, was below
capacity,but by the Federal Reserve Board in its sta- other lending rates charged by banks and other lend-
tutory function as the ultimate regulator of credit. In ing institutions. It was thus apparent to brokerage
1965, the YYSE expanded the sample and devel- ciients-or was called to their attention by some
oped refinements. This series-called Margin Debt- firms-that credit from a broker was the cheapest
-was first released in February 1967, while CNDB thing around. As one leading firm pointed out in a
(though still collected until May 1970) was no brochure included with its mailing of monthly state-
longer published after January 1967. ments to its customers:
The new Margin Debt series was developed, not “Most margin accounts are used to buy or trade
only to measure accurately debt in stock margin ac- securities using credit. The customer puts up part
counts, but to provide the FRB and analysts with of the money for the transaction and the broker
better tools to evaluate other relevant aspectsof se- lends the customer the rest and charges interest
curities credit. The present series begins with Janu- on the loan. But margin accountsare also used by
ary 1965 and provides statistics for indebtedness in investors who wish to deposit securities and bor-
stock margin accounts (excluding all other types of row cash for other purposes.‘,
accounts), collateral securing debt, potential pur- The brochure then went on to describe how conve-
chasing power of margin customers, free credit bal- nient, easyand low-priced this type of loan could be.
ances in margin and cash accounts, the number of To the extent thii appeal was successfuJ,the statis-
margin accounts, and a distribution of accounts in tics would be affected even with no market activity
debit status by net equity groups. Margin debt and
free credit balances are based on repotts that cover
98 per cent of the total margin debt of all NYSE
member firms. All other data are developed from a
sample encompassingmore than 60 per cent of the
margin debt at NYSE member firms. The fine d&ail
and broad coverage of the new series were not pos-
sible until computerized record-keeping became
widespread.
The h4argin Debt series is of great value to the
technician since it isolates data for the margin cus-
tamer-or the speculator, if you will-from all
other types of credit activity. Thus, in most circum-
stances, changes in margin debt or free credit bal-
ances reflect the market activity of margin traders,
who represent an influential, rehtively sophisticated
segment of the stock market, doing more trading
than almost any single institutional group. In com-
parison with previous series on credit, the Margin
Debt series-at least until 1977-gave the techni-
cian a relatively “pure” working tool.
The technician must be wary, however, of those
periods that constitute exceptions-such as the pe
riod from the spring of 1976 to the fall of 1977,
when common stock price measureswere declining
or moving sidewise. Under these conditions, one
wouid not expect stock market credit to expand;
more likely it would decline. Nevertheless, stock
margin debt increased t’rom $6.4 billion in M;lrch
1976 to 69.7 billion at year end 1977-a 50 per
cent advance in a dull or declining market.
Seemingly, margin customers wefe piling up debt at
a time when profitable investment opportunities
were minimaP
Among the circumstancescontributing to the pro-
digious surge in indebtednesswas the disparity in in-
tcrest mtes. In this period, the call loan mte at bra-
58 =
_ JOURNAL ! SEPTEMBER-CXTO6ER 1979 ci 47
 on the customers’ part. By simply executing margin
agreements converting their cash accounts to margin
status and depositing fully owned marginable stocks,
these customers could withdraw funds for a variety
of uses-increasing the dollar amount of stock
margin debt and the number of margin accounts. A
comment by Merrill Lynch’s chairman in mid-1977
gives some inkling of the impact of these loans on
outstanding debt: “$300 million, or 15 per cent, has
been advanced for non-securities purposes.“4 It is
safe to assume that other firms had increases of vary-
ing degree in this form of debt; a rough average for
allNYSEmemberfirmsmightbeintherangeof 10
to 12 per cent, or at least one billion dollars of the
margin debt on the books at the end of 1977. Margin
increases were probably also boosted by the devel-
oping option business. The purchase or naked writ-
ing of options (which must be done through a margin
account) can increase stock margin debt indirectly.
A margin customer with excess purchasing power in
his account can use that purchasing power to take an
option position, thereby adding to his debit balance
and to the total amount of stock margin debt out-
Standitlg.
Departures from the norm cannot be perceived
immediately and, unfortunately, the norm keeps
changing. The recent rise in debt and margin ac-
counts, and the contributing causes, may turn out to
have been an aberration -or it may become the new
norm, affecting margin statistics permanently. Only
time will tell.
A Look Over The Horizon
Many of the statistical series originated in the after-
math of the Securities Acts of the 19309, and subse-
quent improvements in reponing can no longer be
taken for granted. As a consequence of drastic
changes in the securities business in recent years, the
technical analyst must proceed cautiously in inter-
preting the data he uses as the tools of his trade. Un-
fortunately, he cannot breathe more easily once he
has become aware of and understands the new
quirks in the figures, for a number of developments
now on the horizon may wreak further havoc with
market statistics.
On April 17, 1978, ITS-the Intermarket Trad-
ing System-went on line between the New York
and Philadelphia exchanges in 11 stocks (and ex-
panded by 14 more on May 22,1978). Now, instead
of a purchase and sale of 100 shares of XYZ being
consummated entirely on the tloor of the New York
Stock Exchange, the buyer on the NYSE may meet
the seller on the Philadelphia Stock Exchange elec-
- 59 - FINANCIAL ANALYSTS JOURNAL / SEPTEMBl3+OCTOBER
tronically. The split in execution between two trad-
ing floors requires an adjustment in reporting trans-
action totals. Under ITS, the exchange originating
the sale part of the transaction is credited with the
trade, and all such ITS transactions are added to its
daily sales totals.
If and when the SEC lifts its moratorium on fur-
ther expansion of options markets, the NYSE hopes
to enter the options business. Additional puts wiIl
surely become available for trading, and various op-
tions markets will also want to make more calls
availabie. AlI of these elements wilI affect the useful-
ness of the statistics discussed in this article.
Furthermore in early 1977 the SEC proposed to
eliminate the various restrictions on short selling. If
short selling does become easier, it will directly
af%ct the short sales and short interest statistics-
unless, of course, these effects are obscured by a
sharp expansion in put options activity.
As noted, one of the most profound changes fac-
ing the industry is the SEC’s proposed elimination of
NYSE Rule 390, which in essence requires members
to bring their orders to an exchange. If Rule 390 is
repealed and, as many in the industry foresee, up-
stairs markets proliferate, most statistical series will
become useless, if the current experience with up-
stairs market making in odd lots is any indication.
The consolidated tape would presumably continue
to carry overalI volume, but what of its components,
which are the basics of most technical analysts? Such
data as member trading will clearly become almost
worthless: What would be the point of members re-
porting their transactions executed on the floor of
the NYSE if they were doing most of their business
in private offices? What would be the point of re-
quiring public short sales on the floor to be reported,
if short selling were diverted to upstairs markets? It
would seem that the new watchword for the techni-
cal analyst, at least where his pet numbers are con-
cerned, has to be “eternal vigilance.‘* H
Footnotes
1. Another recent development that affectsthe usefulness
of odd-lot data is the shift of some unknown portion of
odd-lot activity to automated systems, such as
COMEX on the Pacific Stock Exchange.
2. What was also striking was the increasing debt at a
time when the speculator seekinglevered trading op-
portunities had an alternative of growingpopularity-
the purchase of standarcliied call options on an in-
creasing number of stocks.
3. Brochureaissuedby Merrill Lynch, Pierce, Fenner&
Smith, Inc., Fekuary and May 1977.
4. Wall Street Journal, 22 June 1977, p. 2. .
1978