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William Peter Hamilton.

The stock market barometer; a study of its forecast value based on Charles H. Dow's theory of the price movement. With an analysis of the market and its history since 1897 online

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THE
STOCK MARKET BAROMETER



THE

STOCK MARKET
BAROMETER



A Study of Its Forecast Value Based on

Charles H. Dow's Theory of the

Price Movement. With an

Analysis of the Market

and Its History

Since 1897



By
WILLIAM PETER HAMILTON

Editor of The Wall Street Journal




HARPER y BROTHERS PUBLISHERS
NEW YORK AND LONDON



THB STOCK MARKET BAKOMETEB

Copyright, 1922
By Harper & Brothers
Printed in the U. S. A.



First Edition
B-W



To

My Old Friend and Colleague

HUGH BANCROFT

without whose suggestion and encouragement

this book would not have

been written



LIST OF CONTENTS

CHAPTER

I. CYCLES AND STOCK MARKET RECORDS i

II. WALL STREET OF THE MOVIES 9

III. CHARLES H. Dow, AND His THEORY 21

IV. Dow's THEORY, APPLIED TO SPECULATION 30

V. MAJOR MARKET SWINGS 4

VI. A UNIQUE QUALITY OF FORECAST 49

VII. MANIPULATION AND PROFESSIONAL TRADING 60

VIII. MECHANICS OF THE MARKET 73

IX. "WATER" IN THE BAROMETER 87

X. "A LITTLE CLOUD OUT OF THE SEA, LIKE A MAN'S

HAND" 1906 101

XI. THE UNPUNCTURED CYCLE 115

XII. FORECASTING A BULL MARKET 1908-1909 128

XIII. NATURE AND USES OF SECONDARY SWINGS 142

XIV. 1909, AND SOME DEFECTS OF HISTORY 154

XV. A "LINE" AND AN EXAMPLE 1914 172

XVI. AN EXCEPTION TO PROVE THE RULE 185

XVII. ITS GREATEST VINDICATION 1917 196

XVIII. WHAT REGULATION DID TO OUR RAILROADS 208

XIX. A STUDY IN MANIPULATION 1900-1 221

XX. SOME CONCLUSIONS 1910-14 237

XXI. SOME THOUGHTS FOR SPECULATORS ,... 250

APPENDIX: RECORD OF THE DOW-JONES AVERAGES 269



PREFACE

A preface is too often an apology, or at best an
explanation of what should be sufficiently clear. This
book requires no apology, and if it fails to explain
itself the fault is that of the author. But acknowl-
edgment must be made most gratefully to Clarence
W. Barren, president of Dow, Jones & Co., and to
Joseph Cashman, manager of that great financial
news service, for permission to use the indispensable
Dow-Jones stock-price averages, and to my old com-
rade in Wall Street newspaper work, Charles F.
Renken, compiler of those averages, for the charts
here used in illustration.

W. P. H.



THE
STOCK MARKET BAROMETER



THE
STOCK MARKET BAROMETER

Chapter I

CYCLES AND STOCK MARKET RECORDS

AN English economist whose unaffected humanity
XJL always made him remarkably readable, the late
William Stanley Jevons, propounded the theory of a
connection between commercial panics and spots on
the sun. He gave a series of dates from the beginning
of the seventeenth century, showing an apparent coinci-
dence between the two phenomena. It is entirely
human and likable that he belittled a rather ugly com-
mercial squeeze of two centuries ago because there
were not then a justifying number of spots on the sun.
Writing in the New York Times early in 1905, in com-
ment on the Jevons theory, I said that while Wall
Street in its heart believed in a cycle of panic and pros-
perity, it did not care if there were enough spots on the
sun to make a straight flush. Youth is temerarious
and irreverent. Perhaps it would have been more
polite to say that the accidental periodic association
proved nothing, like the exact coincidence of presi-
dential elections with leap years.

Cycles and the Poets

Many teachers of economics, and many business
men without pretension even to the more modest title



2 THE STOCK MARKET BAROMETER

of student, have a profound and reasonable faith in a
cycle in the affairs of men. It does not need an under-
standing of the Einstein theory of relativity to see
that the world cannot possibly progress in a straight
line in its moral development. The movement would
be at least more likely to resemble the journey of our
satellite around the sun, which, with all its planetary
attendants, is moving toward the constellation of
Vega. Certainly the poets believe in the cycle theory.
There is a wonderful passage in Byron's "Childe
Harold" which, to do it justice, should be read from
the preceding apostrophe to Metella's Tower. This
was Byron's cycle :

"Here is the moral of all human tales,
'Tis but the same rehearsal of the past;
First freedom and then glory ; when that fails
Wealth, vice, corruption, barbarism at last,
And history, with all her volumes vast,
Hath but one page."

There seems to be a cycle of panics and of times of
prosperity. Anyone with a working knowledge of
modern history could recite our panic dates 1837,
1857, 1866 (Overend-Gurney panic in London), 1873,
1884, 1893, 1907, if he might well hesitate to add the
deflation year of 1920. Panics, at least, show a vari-
able interval between them, from ten to fourteen years,
with the intervals apparently tending to grow longer.
In a subsequent chapter we shall analyze this cycle
theory, to test its possible usefulness.



CYCLES AND STOCK MARKET RECORDS 3

Periodicity

But the pragmatic basis for the theory, a working
hypothesis if nothing more, lies in human nature itself.
Prosperity will drive men to excess, and repentance for
the consequence of those excesses will produce a corre-
sponding depression. Following the dark hour of
absolute panic, labor will be thankful for what it can
get and will save slowly out of smaller wages, while
capital will be content with small profits and quick
returns. There will be a period of readjustment like
that which saw the reorganization of most of the
American railroads after the panic of 1893. Pres-
ently we wake up to find that our income is in excess
of our expenditure, that money is cheap, that the
spirit of adventure is in the air. We proceed from
dull or quiet business times to real activity. This
gradually develops into extended speculation, with
high money rates, inflated wages and other familiar
symptoms. After a period of years of good times the
strain of the chain is on its weakest link. There is a
collapse like that of 1907, a depression foreshadowed
in the stock market and in the price of commodities,
followed by extensive unemployment, often an actual
increase in savings-bank deposits, but a complete
absence of money available for adventure.

Need for a Barometer

Read over Byron's lines again and see if the parallel
is not suggestive. What would discussion of business



4 THE STOCK MARKET BAROMETER

be worth if we could not bring at least a little of the
poet's imagination into it? But unfortunately crises
are brought about by too much imagination. What
we need are soulless barometers, price indexes and
averages to tell us where we are going and what we
may expect. The best, because the most impartiaf,
the most remorseless of these barometers, is the
recorded average of prices in the stock exchange.
With varying constituents and, in earlier years, with a
smaller number of securities, but continuously these
have been kept by the Dow-Jones news service for
thirty years or more.

There is a method of reading them which has been
fruitful of results, although the reading has on occa-
sion displeased both the optimist and the pessimist.
A barometer predicts bad weather, without a present
cloud in the sky. It is useless to take an axe to it
merely because a flood of rain will destroy the crop of
cabbages in poor Mrs. Brown's backyard. It has been
my lot to discuss these averages in print for many
years past, on the tested theory of the late Charles H.
Dow, the founder of The Wall Street Journal. It
might not be becoming to say how constantly helpful
the analysis of the. price movement proved. But one
who ventures on that discussion, who reads that bar-
ometer, learns to keep in mind the natural indignation
against himself for the destruction of Mrs. Brown's
cabbages.

Dow's Theory

Dow's theory is fundamentally simple. He showed
that there are, simultaneously, three movements in



CYCLES AND STOCK MARKET RECORDS 5

progress in the stock market. The major is the pri-
mary movement, like the bull market which set in with
the re-election of McKinley in 1900 and culminated in
September, 1902, checked but not stopped by the
famous stock market panic consequent on the Northern
Pacific corner in 1901; or the primary bear market
which developed about October, 1919, culminating
June- August, 1921.

It will be shown that this primary movement tends
to run over a period of at least a year and is generally
much longer. Coincident with it, or in the course of
it, is Dow's secondary movement, represented by sharp
rallies in a primary bear market and sharp reactions
in a primary bull market. A striking example of the
latter would be the break in stocks on May 9, 1901.
In like secondary movements the industrial group
(taken separately from the railroads) may recover
much more sharply than the railroads, or the railroads
may lead, and it need hardly be said that the twenty
active railroad stocks and the twenty industrials, mov-
ing together, will not advance point for point with each
other even in the primary movement. In the long
advance which preceded the bear market beginning
October, 1919, the railroads worked lower and were
comparatively inactive and neglected, obviously be-
cause at that time they were, through government
ownership and guaranty, practically out of the specu-
lative field and not exercising a normal influence on
the speculative barometer. Under the resumption of
private ownership they will tend to regain much of
their old significance.



6 THE STOCK MARKET BAROMETER

The Theory's Implications

Concurrently with the primary and secondary move-
ment of the market, and constant throughout, there
obviously was, as Dow pointed out, the underlying
fluctuation from day to day. It must here be said that
the average is deceptive for speculation in individual
stocks. What would have happened to a speculator
who believed that a secondary reaction was due in
May, 1901, as foreshadowed by the averages, if of all
the stocks to sell short on that belief he had chosen
Northern Pacific? Some traders did, and they were
lucky if they covered at sixty-five points loss.

Dow's theory in practice develops many implica-
tions. One of the best tested of them is that the two
averages corroborate each other, and that there is
never a primary movement, rarely a secondary move-
ment, where they do not agree. Scrutiny of the aver-
age figures will show that there are periods where the
fluctuations for a number of weeks are within a narrow
range; as, for instance, where the industrials do not
sell below seventy or above seventy-four, and the rail-
roads above seventy-seven or below seventy-three.
This is technically called "making a line," and experi-
ence shows that it indicates a period either of distribu-
tion or of accumulation. When the two averages rise
above the high point of the line, the indication is
strongly bullish. It may mean a secondary rally in a
bear market; it meant, in 1921, the inauguration of a
primary bull movement, extending into 1922.

If, however, the two averages break through the



CYCLES AND STOCK MARKET RECORDS 7

lower level, it is obvious that the market for stocks
has reached what meteorologists would call "satura-
tion point." Precipitation follows a secondary bear
movement in a bull market, or the inception of a pri-
mary downward movement like that which developed
in October, 1919. After the closing of the Stock Ex-
change, in 1914, the number of industrials chosen for
comparison was raised from twelve to twenty and it
seemed as if the averages would be upset, especially
as spectacular movements in stocks such as General
Electric made the fluctuations in the industrials far
more impressive than those in the railroads. But
students of the averages have carried the twenty chosen
stocks back and have found that the fluctuations of the
twenty in the previous years, almost from day to day,
coincided with the recorded fluctuations of the twelve
stocks originally chosen.

Dow-Jones Averages the Standard

The Dow-Jones average is still standard, although
it has been extensively imitated. There have been
various ways of reading it; but nothing has stood the
test which has been applied to Dow's theory. The
weakness of every other method is that extraneous
matters are taken in, from their tempting relevance.
There have been unnecessary attempts to combine the
volume of sales and to read the average with refer-
ence to commodity index numbers. But it must be
obvious that the averages have already taken those
things into account, just as the barometer considers



8 THE STOCK MARKET BAROMETER

everything which affects the weather. The price move-
ment represents the aggregate knowledge of Wall
Street and, above all, its aggregate knowledge of com-
ing events.

Nobody in Wall Street knows everything. I have
known what used to be called the "Standard Oil
crowd," in the days of Henry H. Rogers, consistently
wrong on the stock market for years together. It is
one thing to have "inside information" and another
thing to know how stocks will act upon it. The market
represents everything everybody knows, hopes, be-
lieves, anticipates, with all that knowledge sifted down
to what Senator Spooner once called, in quoting a Wall
Street Journal editorial in the United States Senate,
the bloodless verdict of the market place.



Chapter II

WALL STREET OF THE MOVIES

WE shall prove, by strict analysis, the fidelity of
the stock market barometer, tested over a
long period of years. With the aid of Dow's theory
of the price movement we shall examine the major
swings upwards or downwards, extending from less
than a year to three years or more; their secondary
interruption in reactions or rallies, as the case may be ;
and the relatively unimportant but always present daily
fluctuation. We shall see that all these movements
are based upon the sum of Wall Street's knowledge
of the business of the country ; that they have no more
to do with morality than the precession of the equi-
noxes, and that manipulation cannot materially deflect
the barometer.

Movies and Melodrama

But, to judge from some of my correspondence, the
case must not even be argued, because it is alleged
that Wall Street does not come into court with clean
hands. It has seemed, in the past, at least discour-
aging to point out how the dispassionate, the almost
inhuman, movement of the market has nothing what-
ever to do with the occasional scandals which disfigure
the record of every market for anything anywhere.
But the proportion of people who only feel is, to those
who think, overwhelming. The former are in such a



io THE STOCK MARKET BAROMETER

majority that concession must be made to them, al-
though I still decline to apologize for the stock market.
I should as soon think of apologizing for the meridian
of Greenwich. To quote one of the best known of
Grover Cleveland's useful platitudes, it is a condition
and not a theory which confronts us.

In the popular imagination there is a fearful and
wonderful picture of Wall Street something we may
call the Wall Street of the movies. What the English
call the cinema is our modern substitute for the con-
ventional melodrama of our grandfathers. Its char-
acters are curiously the same. Its villains and vampires
are not like anything in real life; but they behave as
consistent villains or vampires ought to behave if they
are to satisfy critics who never saw a specimen of
either. Many years ago Jerome K. Jerome wrote a
chapter on stage law. He showed that on the English
stage the loss of a three-and-six-penny marriage certi-
ficate invalidated the marriage. In the event of death
the property of the testator went to the person who
could secure possession of the will. If the rich man
died without a will the property went to the nearest
villain. In those days lawyers looked like lawyers
on the stage. The detective looked like a gimlet-eyed
sleuth, and a financier looked so like a financier that
it positively seemed to hurt his face.

Financiers of Fiction

Our modern financier on the screen looks like that,
especially in the "close-ups." But he is no new creation.



WALL STREET OF THE MOVIES 1 1

I remember reading a magazine story, a score of years
ago, of a stock market coup by a great ''manipulator,"
of the type of James R. Keene. The illustrations were
well drawn and even thrilling. In one of them Keene,
or his prototype, was depicted bending dramatically
over a Consolidated Stock Exchange ticker! It is
to be presumed that he was smashing the market with
ten-share lots. Only a Keene could do it, and only a
Keene of the movies at that. Doubtless the author of
the story, Mr. Edwin Lefevre, who was dissipating
his talents in hazy financial paragraphs for the New
York Globe at that time, felt that he had been artis-
tically frustrated. But perhaps he had himself to
thank. Here is his own description of such a manip-
ulator. It is in a short story published in 1901, called
The Break in Turpentine:

"Now, manipulators of stocks are born, not made. The art
is most difficult, for stocks should be manipulated in such wise
that they will not look manipulated. Anybody can buy stocks
or can sell them. But not every one can sell stocks and at the
same time convey the impression that he is buying them, and
that prices therefore must inevitably go much higher. It re-
quires boldness and consummate judgment, knowledge of tech-
nical stock market conditions, infinite ingenuity and mental
agility, absolute familiarity with human nature, a careful study
of the curious psychological phenomena of gambling and long
experience with the Wall Street public and with the wonderful
imagination of the American people ; to say nothing of knowing
thoroughly the various brokers to be employed, their capabilities,
limitations and personal temperaments; also, their price."

That is professedly fiction, and, incidentally, more
true and respectable as art than the product of the



12 THE STOCK MARKET BAROMETER

melodrama or the screen. It lays no stress on the
deeper knowledge of values and business conditions
necessary to assure the existence of the kind of market
which alone makes manipulation possible. Truth is
stranger than fiction, and perhaps harder to write,
although the remark is open to an obvious retort.

Silk Hats and Strained Faces

Not long ago there appeared a letter to a popular
newspaper, notorious for what may be called the anti-
Wall Street complex. It professed to give, in a series
of gasps, the impressions of a Western stranger on
visiting Wall Street. One of these "flashlights" was,
"silk hats and strained faces." Let me be exact. I
have seen a silk hat in Wall Street. It was when
Mayor Seth Low opened the new Stock Exchange in
1901. My stenographer, bless her honest heart, said
it was real stylish. But financiers of the movies tend
to wear silk hats, just as the heroes in melodrama,
even when reduced to penury and rags, wore patent-
leather shoes. A screen financier without a silk hat
would be like an egg without salt. We cannot other-
wise infer, as we are required, that he is a bad egg.

"A Long Way Back for Soup"

Only a few years ago there was a severely localized
scandal over a "corner" in a stock called Stutz Motor,
for which no true market had been established. No-
body was hurt except a few speculators who chose
to sell the thing short. They paid up without whin-



WALL STREET OF THE MOVIES 13

ing. But it formed an irresistible text for a popular
attack upon Wall Street. One of the New York news-
papers said that the incident was only in a piece with
"the Metropolitan Traction corruptionists, the New
Haven wreckers, the Rock Island wreckers, and" what
it called, with a free rendering of history, "the life
insurance corruptionists." This was in a newspaper
professing to sell news. It did not tell its readers that
the last of the Metropolitan Street Railway financing
happened twenty years before. Even the foolish and
indefensible capitalization of the surface lines of New
York, unloaded on what was then called the Inter-
borough Metropolitan Company, was fifteen years old.
The life insurance investigation, which, incidentally,
neither charged nor proved "corruption," went back
sixteen years. Even the last essay in misjudged New
Haven financing, a comparatively minor matter, oc-
curred fully eleven years earlier; that of Rock Island,
nineteen years before; while that favorite charge
against Wall Street, the recapitalization of the Chicago
& Alton, was carried through in 1899 an< ^ not a sou ^
saw anything wrong with it until 1907. I suppose I
write myself down a hopeless reactionist when I say
that, with the fullest knowledge of the facts, I cannot
see anything reprehensible in it now.

Widows and Orphans

Even an incident so spectacular as the Northern
Pacific corner, with the purely stock market panic which
it produced, cannot be pleaded as an example of a kind



14 THE STOCK MARKET BAROMETER

of manipulation which would disable our barometer.
That particular panic occurred in the course of a pri-
mary bull market. It produced merely a severe secon-
dary reaction, for the upward movement was resumed
and did not culminate until sixteen months afterwards.
That incident of 1901, however, is still alive and kick-
ing, so far as the politicians who denounce Wall Street
are concerned. It is remarkable that all the stock
affected in these bygone incidents is alleged to have
been held by widows and orphans. I wish somebody
would marry that widow and adopt, or even spank,
the orphan. After depriving their trustees of the
commonest business sense they have no right to come
around in this indelicate way and remind us of our
crimes. There is a lucrative engagement waiting for
them elsewhere in the movies.

Dow's Theory True of any Stock Market

Let us be serious, and get back to our text. The
law which governs the movement of the stock market,
formulated here, would be equally true of the London
Stock Exchange, the Paris Bourse or even the Berlin
Boerse. But we may go further. The principles un-
derlying that law would be true if those Stock Ex-
changes and ours were wiped out of existence. They
would come into operation again, automatically and
inevitably, with the re-establishment of a free market
in securities in any great capital. So far as, I know,
there has not been a record corresponding to the Dow-
Jones averages kept by any of the London financial



WALL STREET OF THE MOVIES 15

publications. But the stock market there would have
the same quality of forecast which the New York
market has if similar data were available.

It would be possible to compile from the London
Stock Exchange list two or more representative
groups of stocks and show their primary, their secon-
dary and their daily movements over the period of
years covered by Wetenhall's list and the London
Stock Exchange official list. An average made up of
the prices of the British railroads might well confirm
our own. There is in London a longer and more
diversified list of industrial stocks to draw upon. The
averages of the South African mining stocks in the
Kaffir market, properly compiled from the first Trans-
vaal gold rush in 1889, would have an interest all their
own. They would show how gold mining tends to
flourish when other industries are stagnant or even
prostrated. The comparison of that average with the
movement of securities held for fixed income would be
highly instructive to the economist. It would demon-
strate in the most vivid way the relation of the pur-
chasing power of gold to bonds held for investment.
It would prove conclusively the axiom that the price
of securities held for fixed income is in inverse ratio to
the cost of living, as we shall see for ourselves in a
later chapter.

The Fact Without the Truth is False

It is difficult, and with many observers it has proved
impossible, to regard Wall Street comprehendingly



1 6 THE STOCK MARKET BAROMETER

from the inside. Just as it will be shown that the
market is bigger than the manipulator, bigger than
all the financiers put together, so it is true that the
stock market barometer is in a way bigger than the
stock market itself. A modern writer, G. K. Chester-
ton, has said that the fact without the truth is sterile,
that the fact without the truth is even false. It was
not until Charles H. Dow propounded his theory of
the price movement that any real attempt had been
made to elicit and set forth the truth contained in the
fact of the stock market. Can we make it possible
for the man whose business brings him into the midst
of that whirling machinery to understand the power


1 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Online LibraryWilliam Peter HamiltonThe stock market barometer; a study of its forecast value based on Charles H. Dow's theory of the price movement. With an analysis of the market and its history since 1897 → online text (page 1 of 20)