Continued from...Cycles and Laws of Stock Market Movements
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 FormBut we have been able to go further than this. From the preceding article alone we see that every major swing is justified by the subsequent condition of the country's general business. It has neither needed nor received manipulation. The market consequently has often seemed to run counter to business conditions, but only for the reason which represents its greatest usefulness. It is then fulfilling its true function of prediction. It is telling us not what business is today but what the future course of business will be. News known is news discounted. What everybody knows has ceased to be a market factor, except in the rare instance of a panic, when the stock market is confessedly taken by surprise.
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 ExampleAt the beginning of the last week of August, 1921 it looked as if the bear market might be resumed by the establishment of new low points in both averages. But remembering that the averages must confirm each other, The Wall Street Journal said, on August 25th:
"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 CriticsHere is the application of our theory, and the reader can judge from the subsequent course of the market the value of the stock market barometer. He can even make the same analysis for himself, given the same major premise and carefully tested reasoning from it.
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.
From The Stock Market Barometer by William P. Hamilton, published in 1922
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