Manipulation and Professional Trading

Readers of preceding chapters may well pause here to take count of how much we have been able to infer, and how much of our inference we have been able to prove, starting on the sound basis of Dow's theory of the stock market. We have satisfied ourselves that he was right when he said that there are in progress three definite movements in the market - the major swing, upwards or downwards; its occasional suspension by a secondary rally or reaction, as the case may be; and the incalculable, and for our purposes largely negligible, daily fluctuation. We can satisfy ourselves from examples that a period of trading within a narrow range - what we have called a "line" - gaining significance as the number of trading days increases, can only mean accumulation or distribution, and that the subsequent price movement shows whether the market has become bare of stocks or saturated with an oversupply.
 

True to Form

When these articles appeared in serial form in Barron's, the national financial weekly, I included the following inference, based upon the reading of our barometer, on September 18, 1921, the date when the quoted paragraph was written. It appeared on November 5, 1921. It was no guess, but a scientific deduction from sound premises, and correctly announced the change in the main direction of the market.

"There is a pertinent instance and test in the action of the current market. I have been challenged to offer proof of the prediction value of the stock market barometer. With the demoralized condition of European finance, the disaster to the cotton crop, the uncertainties produced by deflation, the unprincipled opportunism of our lawmakers and tax-imposers, all the aftermath of war inflation - unemployment, uneconomic wages in coal mining and railroading - with all these things over-hanging the business of the country at the present moment, the stock market has acted as if there were better things in sight. It has been saying that the bear market which set in at the end of October and the beginning of November, 1919, saw its low point on June 20, 1921, at 64.90 for the twenty industrials and 65.52 for the twenty railroad stocks.
 

A Contemporary Example

"So far as the averages are concerned, they are far from encouraging to the bull, but they do not yet jointly indicate a definite resumption of the main bear movement."

The railroad stocks were forming a "line" at that time, and after a technical break of a fraction of a point through on the lower side it was resumed, and no new low point, indicating a definite resumption of the main bear movement, was given. On September 21st, after a remarkable continuance of the line of probable accumulation in the railroad stocks and a confirmatory rally in the industrials, The Wall Street Journal's "Study in the Price Movement" said:

"It is beside the point to say that we are facing a hard winter. The stock market is meaningless if it does not look beyond such contingencies. It seems to be forecasting a solid foundation for better general business in the spring. It may well be that the stage for a primary bull market is being set."

By that time both the industrials and the railroads had well-developed lines of presumed accumulation, and the former had significantly made a higher point than that of the previous rally. The Wall Street journal's analysis of October 4th said:

"By the well-tried methods of reading the stock market averages, only a decline of eight points in the industrial average, and nine points in the railroads, or below the low figures of the main bear movement recorded June 20th, would indicate a resumption of that movement. On the other hand, the railroad stocks alone at present figures would need to advance less than a point to record the repeated new high for both averages which would indicate a primary bull market. The industrials have already recorded that point, and both averages have shown a remarkably clear and distinct line of accumulation which is likely at any time to disclose a market bereft of its floating supply of stocks."

In the last paragraph of this closely reasoned analysis it was said:

"Prices are low because all these bearish factors our critics adduce have been discounted in the prices. When the market is taken by surprise there is a panic, and history records how seldom it is taken by surprise. Today all the bear factors are known, serious as they admittedly are. But the stock market is not trading on what is common knowledge today but upon the sum of expert knowledge applied to conditions as they can be foreseen many months ahead."
 

Henry H. Rogers and His Critics

The professional speculator might well encourage the general belief that he is invulnerable and invincible, even if an ignorant public assumes that the cards are stacked against itself and that the professional knows their backs as well as their faces. Many years ago the late Henry H. Rogers, who was not talking for publication, said to me:

"The sensational newspapers, which are always attacking John D. Rockefeller and his associates for their wealth, have put millions into the treasury of the Standard Oil Company.  You and I know that we are not omniscient or all-powerful. But, by editorial innuendo and suggestion in cartoons, the people who hold us up to popular envy and hate have created exactly that impression. When everybody who may have to do business with us assumes in advance that we can dictate our own terms, we have an invaluable business asset."

The same agitation brought about the dissolution of the Standard Oil into its thirty-three constituent companies. That operation trebled the value of Standard Oil shares, and, incidentally, the price of gasoline. Perhaps these newspaper proprietors were holders of the stock. That was before the era of the Ford car, however, and they may have assumed that it was a public service to make the rich owner of a motor car pay more for his gasoline.

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