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AIC INVESTMENT ADVISORS, INC.
440 South Street, Pittsfield, Massachusetts
(October 20, 1997) STOCK INDICES: Stock prices rose to record levels in the third quarter. The Dow Jones Industrial Average (DJIA) and the Standard & Poor's 500 Index (S&P 500) recorded their third quarter peaks on August 6 and trended lower to sideways through the close of the quarter. The DJIA traded down to the 7550-7600 range intra-day on three occasions during the quarter and closed the quarter approximately where it began in July at the 7900 level. Early October trading in the DRA failed to bring a new high–a non-confirmation of the new high established by the Dow Jones Transportation Index that Dow Theory followers could find disconcerting. Volatility remains high for the DJIA as the divisor, at 0.254507, insures wide movements in the average.
Trading in the S&P 500 was confined to the 900 to 960 range for the quarter although the index broke higher to close at yet a new record high in early October. Overall, third quarter price action in the S&P 500 resulted in moderating the rate of increase in equity prices for the year to date. The S&P 500 remains approximately 100 points above its 200-day moving average compared with a difference of 120 points at the beginning of the quarter.
The NASDAQ Composite Index rose sharply in early August, retraced slightly and then continued to advance strongly. The move was a continuation of the upward trend in the NASDAQ Composite that has been underway since the April lows. The NASDAQ Composite advanced about 17.2% during the third quarter and the advance has continued at the same rate through the first two weeks of October. The relative strength of the NASDAQ Composite was superior to that of the S&P 500 although the slope of the relative strength curve flattened during the last two weeks of September.
A variety of technical indicators measuring monetary and other factors remain positive, suggesting further advances in equity prices in the weeks ahead despite the reservations of many market observers. The cash position of equity mutual funds at 5.6% of assets is on the low side. On the other hand, the credit balances of investor's brokerage accounts is $66.4 billion and is increasing sharply, which is a bullish factor. Margin debt totals $120.0 billion and is increasing-rising margin debt is usually considered a positive sign for stock prices until stock prices commence a cyclical contraction. (When a downturn develops, falling prices force the sale of equities and a general retrenchment in positions.) Meanwhile, the AIC trend-cycle analysis of equity prices remains in positive territory at slightly above the 100.5 line.
Richard F. Maloney
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