Continued from...Stock Market Speculation and Prediction
We have seen in past discussions of Dow's theory of the stock-market price movement that the essence of it could be summed up in three sentences. In an editorial published December 19, 1900, he says, in The Wall Street Journal:
"The market is always to be considered as having three movements, all going on at the same time. The first is the narrow movement from day to day. The second is the short swing, running from two weeks to a month or more; the third is the main movement, covering at least four years in its duration".
It has already been shown that his third and main
movement may complete itself in much less than Dow's assumed four years,
and also how an attempt to divide the ten-year period of the panic cycle
theory into a bear and bull market of approximately five years each led
to an unconscious exaggeration. That, however, is immaterial. Dow had successfully
formulated a theory of the market movements of the highest value, and had
synchronized those movements so that those who came after him could construct
a business barometer.
The Truth Beneath SpeculationThis is the essence of Dow's theory, and it need hardly be said that he did not see, or live to see, all that it implied. He never wrote a single editorial on the theory alone, but returns to it to illustrate his discussions on stock-market speculation, and the underlying facts and truths responsible not only for speculation (using the word in its best and most, useful sense) but for the market itself.
It is not surprising that The Wall Street Journal received many inquiries as to the assumptions it made on the basis of Dow's major premise. On January 4, 1902, Dow replies to a pertinent question, and any thoughtful reader of these pages should be able to answer it himself. The correspondent asks him, "For some time you have been writing rather bullish on the immediate market, yet a little bearish in a larger sense. How do you make this consistent?" Dow's reply was, of course, that he was bullish after the secondary swing but that he did not think, in view of stock values from earnings of record, that a bull market which had then been operative sixteen months could run much further. It was a curious contraction, incidentally, of his own minimum four-year estimate, but that major upward swing as a matter of fact ran until the following September. It may be said that such a swing always outruns values. In its final stage it is discounting possibilities only.
From The Stock Market Barometer by William P. Hamilton, published in 1922
|Dow's Theory, Applied to Speculation||Bull and Bear Period Definition and Forecasts|
|Dow's own application of his Theory||Trading on Averages|