Continued from...Trading on Averages
It may be said, in continuing the discussion of
what Charles H. Dow actually published in the columns of The Wall Street
Journal, on his now well-known theory of the stock price movement
as shown by the averages, and it must be emphasized, that he was consciously
devising a scientific barometer for practical use. Remember the difference
between the thermometer and a barometer. The thermometer records actual
temperature at the moment, just as the stock ticker records actual prices.
But it is essentially the business of a barometer to predict. In that lies
its great value, and in that lies the value of Dow's Theory. The stock
market is the barometer of the country's, and even of the world's, business,
and the theory shows how to read it.
The Averages Sufficient in ThemselvesIt stands alone in this respect, for a sufficient reason. Wall Street has been called "the muddy source of the nation's prosperity", and we need not concern our selves with question-begging adjectives. The sum and tendency of the transactions in the Stock Exchange represent the sum of all Wall Street's knowledge of the past, immediate and remote, applied to the discounting of the future. There is no need to add to the averages, as some statisticians do, elaborate compilations of commodity price index numbers, bank clearing, fluctuations in exchange, volume of domestic and foreign trade or anything else. Wall Street considers all these things. It properly regards them as experience of the past, if only of the immediate past, to be used for estimating the future. They are merely creating causes of the weather predicted.
It is a common superstition, exemplified in the
Pujo Committee's inquiry into some supposed supercontrol of banking and
finance, that "powerful interests" in Wall Street exist which have a sort
of monopoly of knowledge and use it to their own nefarious ends. The stock
market is bigger than all of them, and the financial interests of Wall
Street are seldom combined except momentarily to stop a panic, as in the
crisis of 1907. Taken separately, or even in temporary alliance, these
interests are often wrong in their estimate of the stock market. In the
days of H. H. Rogers and the supposedly all-powerful activities of what
was called the Standard Oil group, I have known that group wrong on stocks
for months and even years together. There was no shrewder judge of business
conditions as affecting great enterprises than Henry H. Rogers, but I have
heard him argue seriously that it was not he that was wrong but the stock
market and the headstrong public.
Bigger Than any ManipulationIn the price movements, as Dow correctly saw, the sum of every scrap of knowledge available to Wall Street is reflected as far ahead as the clearest vision in Wall Street can see. The market is not saying what the condition of business is today. It is saying what that condition will be months ahead. Even with manipulation, embracing not one but several leading stocks, the market is saying the same thing, and is bigger than the manipulation. The manipulator only foresees values which he expects and hopes, sometimes wrongly, the investing public will appreciate later. Manipulation for the advance is impossible in a primary bear market. Any great instances of designed manipulation - and they are few in number - occurred in a primary bull market, necessarily so because the market sees more than the manipulator. A personal experience of not only Wall Street but other great markets has taught that manipulation in a falling market is practically non-existent. The bear trader carries his own letter of marque, and fights for his own hand. A major bear swing has always been amply justified by future events, or for exception, as in 1917, by terrifying future possibilities.
Writing in a Bull MarketStarting feebly near the end of June, 1900, with a pitifully small volume of transactions, four months before the re-election of McKinley, a bull market developed which covered a period of more than twenty-six months. This was interrupted by the May panic of 1901, arising out of the Northern Pacific corner, proving to be only a secondary downward swing of a typical, if violent, kind. It was during the course of this bull market that Dow wrote the editorials in The Wall Street Journal to which reference has here been freely made because they contain the substance of his theory. He had designed a barometer for practical use, and it is characteristic of the man that he proceeded to apply it, to find out if it had the vital quality of dependable forecast. It is a pity that he could not have lived to test it in the twelve months' bear market which followed. All subsequent market swings, up or down, have proved the value of his method.
Throughout that bull market his forecasts were remarkably accurate, if necessarily general and not applied to particular stocks or small groups. He was correct in the essential matter of the adjustment of prices to values. His concluding editorials were published in July, 1902, not long before his death. In those he foresaw that prices were outrunning values, and that within a few months, the market would begin to predict a contraction in railroad earnings, at least a slower development in the great industrial groups, and contraction of trade elsewhere.
From The Stock Market Barometer by William P. Hamilton, published in 1922
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