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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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 4 of 20)
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One of the greatest of misconceptions, that which
has militated most against the usefulness of the stock
market barometer, is the belief that manipulation can
falsify stock market movements otherwise authorita-
tive and instructive. The writer claims no more
authority than may come from twenty-two years of
stark intimacy with Wall Street, preceded by prac-
tical acquaintance with the London Stock Exchange,
the Paris Bourse and even that wildly speculative mar-
ket in gold shares, "Between the Chains," in Johannes-
burg in 1895. But in all that experience, for what it



may be worth, it is impossible to recall a single instance
of a major market movement which depended for its
impetus, or even for its genesis, upon manipulation.
These discussions have been made in vain if they have
failed to show that all the primary bull markets and
every primary bear market have been vindicated, in
the course of their development and before their close,
by the facts of general business, however much over-
speculation or over-liquidation may have tended to
excess, as they always do, in the last stage of the
primary swing.

A Financial Impossibility

This is a sweeping statement, but I am convinced
of its fundamental truth. When James R. Keene
took up the task of marketing two hundred and twenty
thousand shares of Amalgamated Copper, for the
people who had brought about that amalgamation but
had not been able to float the stock, it is estimated that
in the course of distribution he must have traded in
at least seven hundred thousand shares of that stock.
He carried the price to above par to realize a net of
ninety to ninety-six for his employers. This was a
relatively small stock capitalization; but let us assume
that some syndicate, larger than any that the stock
market has ever seen, necessarily involving the co-
operation of all the great banking institutions, under-
took to manufacture the general bull market without
which Keene's efforts would have been worse than
wasted. Let us concede that this super-syndicate could
afford to ignore the large number of active securities


outside of the forty active stocks taken in our railroad
and industrial averages and defy all trained public
opinion. Let us assume that they had accumulated for
the rise, against all their previous practice and con-
viction, without, by some miracle, arousing suspicion,
not two hundred and twenty thousand shares of stock,
but a hundred times that number.

Anybody who learned in the little red school house
that two and two make four must see that we are here
leading ourselves into an arithmetical impossibility.
This syndicate would presumably not be content with
less than a forty-point net profit, and its actual trades,
before it had established a broad general market even
equivalent to that Keene established for Amalgamated
Copper, alone would therefore amount to something
like one hundred and twenty million shares, which,
taking them at par, would involve financing to the
amount of many billions of dollars so much financing,
in fact, that the great banks concerned would presum-
ably relinquish all their other business and confine
themselves to the syndicate operations alone. Such a
syndicate could not have done this, or a tithe of this,
at any time during the existence of our national bank-
ing system. Does anybody think it would be possible
to undertake such a panic-breeding operation with the
assistance of the Federal Reserve system?

Where Manipulation Was Possible

To state the terms of a corresponding bear opera-
tion, where every wealthy member of the syndicate is


necessarily already a large holder in stocks, bonds,
real estate and industrial production, would reduce
the whole thing to the wildest absurdity. My mind
refuses even to grasp it. Keene, in a broad bull
market, to distribute a number of shares amounting
to one- twenty-fifth of the common stock alone of the
United States Steel Corporation, had behind him all
the wealth and influence of the powerful Standard
Oil group. When he distributed United States Steel
common and preferred he had behind him not only
the great Morgan banking influences but those of
every group that came into that steel combination,
with the general approval of a public which correctly
recognized a wonderful and even unprecedented
expansion in production and trade. But even with
that backing could he have multiplied his efforts a
hundredfold? The merchant, the banker, the manu-
facturer who studies the stock market barometer with
reference to the major swings, can dismiss from his
mind altogether the idea that they are falsified by

Roger W. Babson's Theory

But the idea is widely held. There is no intention
here to arouse or encourage controversy, and if I take
an example from Roger W. Babson and 'his book on
Business Barometers, he will, I am sure, readily
understand that it is not intended in criticism or
depreciation of his highly sincere work. It is only fair
to Mr. Babson to say, also, that the extract I give


here was published in 1909 (the italics are Mr.
Babson's) :

"A slowly sagging market usually means that the ablest spec-
ulators expect in the near future a period of depression in
general business ; and a slowly rising market usually means that
prosperous business conditions may be expected, unless the decline
or rise is artificial and caused by manipulation. In fact, if it
were not for manipulation, merchants could almost rely on the
stock market alone as a barometer, and let these large market
operators stand the expense of collecting the data necessary for
determining fundamental conditions. Unfortunately, however,
it is impossible by studying the stock market alone to distinguish
between artificial movements and natural movements; therefore,
although bankers and merchants may watch the stock market as
one of the barometers, yet they should give to it only a fair and
proportional amount of weight."

Business Barometers Used in the Accumulation of
Money, by Roger W. Babson; second edition, 1910.

Mr. Babson's Chart

What sort of barometer should we have if we had
to make allowances for a tube of mercury that was
too short, or for a general lack of accuracy in the
delicate and sensitive mechanism of the aneroid? The
stock market barometer is not perfect, or, to put it
more correctly, the adolescent science of reading it is
far from having attained perfection. But it is not
imperfect in the sense Mr. Babson here assumes. It
does discharge its function of prediction, when viewed
over any reasonable length of time, with almost
uncanny accuracy. Let us take a few examples from
Mr. Babson's own picture chart, those composite
u plots" above and below a consistently rising line rep-


resenting the steady increase in a growing country's
wealth, and we shall see how the stock market pre-
dicted each of them before Mr. Babson had the mate-
rial to draw them in the squares of his instructive and
striking chart. To those who are unfamiliar with a
publication so interesting it may be said that he divides
his chart with columns for each month of the year ver-
tically, and completes his squares horizontally with
numbered lines showing the area covered by all the
factors of business, above or below a gradually rising
middle line across the chart representing the growing
wealth of the country.

How the Stock Market Predicted

It will be observed that where these areas are shal-
low they tend to become broader in time consumed,
and where the time to complete the area is less the
depression or expansion is deeper or higher, as the case
may be, the black areas above or below being assumed
to balance each other, at least approximately. One of
these black areas of depression shown in the Babson
chart began in 1903, only developing recognizable
space in the latter part of that year, and continued
throughout 1904, finally emerging above the line of
growing wealth in the earlier part of 1905. The stock
market anticipated this area of business depression,
for a primary bear swing began in September, 1902,
and ran until the corresponding month of 1903. Mr.
Babson's area of depression was still ruling when the
market became mildly bullish, in September, 1903, and


strongly bullish before the following June; while the
Babson area of depression was not completed till the
end of that year 1904. The Babson chart does not
show any great degree of expansion until 1906,
although it foreshadows it in September, 1905. But
the stock market barometer foresaw all Mr. Babson's
expansion, and the long bull market continued up to
January, 1907, overrunning itself a tendency of bull
markets and bear markets alike.

A True Barometer

Mr. Babson's area of expansion reached its high
maximum in 1907, when a bear stock market swing
had already set in, continuing for eleven months until
early December of that year, predicting that length of
time ahead Mr. Babson's truly calculated area of
depression, which was deep, but hot long in duration,
and lasted till the end of 1908. His subsequent expan-
sion area above the line did not begin to show itself
in market strength until the end of July of 1908 ; but
the stock market barometer once again foretold the
coming prosperity in a bull market which had its
genesis in December, 1907, and its culmination in
August, 1909, beginning from that time to predict
with equal accuracy, and well in advance, Mr. Babson's
next period of depression.

Surely this shows that the stock market is a barom-
eter, and that the Babson chart is more strictly a
record, from which, of course, people as intelligent as
its industrious compilers can draw valuable guidance


for the future. To use a much-abused word, the stock
market barometer is unique. You will remember that
"unique" is a word which takes no qualifying adjec-
tive. Our barometer is not rather unique, or almost
unique, or virtually unique. There is just one of it,
'and it cannot be duplicated. It does predict, as this
simple illustration has shown, the condition of business
many months ahead, and no other index, or combina-
tion of indices, can assume to do that. Our highly
scientific and competent Weather Bureau often ex-
plodes the fallacy of any assumed radical change in
general weather conditions. It does not pretend to
go back to the glacial age. It tells us that there have
been droughts and hard winters before, coming at
uncertain and incalculable intervals. When it attempts
specific prophecy a single particular from its immense
collection of generals it is merely guessing. Does
anybody who happened to be in Washington at the
time remember the "fair and warmer" weather
prophesied over the Taft inauguration? I went over
the Pennsylvania Railroad on the following day, when
the storm had leveled every telegraph pole between
New York and Philadelphia. It was even said that
some of the special trains had so far missed the parade
that they were not in Washington then. Even the
aneroid barometer can only forecast a limited number
of hours ahead, according to the atmospheric pressure.

Cycles Overestimated

There are other compilations, and that of Harvard
University will be noticed in a more appropriate place.


I am inclined to think that all attach too much force
to the cycle theory, very much as we have seen that
Charles H. Dow did in splitting the favored ten-year
cycle into an assumed but non-existent five-year bear
market and a similar five-year bull market. But Mr.
Babson would tell you that his areas of expansion
and even of inflation, extending not five years but two
years or less than three in point of time, do not neces-
sarily blow their tops off in a final explosion and that
the bottom does not drop out of his period of depres-
sion. A stock market crisis may occur in the middle
of a bull market, like the Northern Pacific panic of
1901 ; or a near-panic, with a development more seri-
ous and radical, may occur in the course of a major
bear swing in the stock market, as in 1907. Mr. Bab-
son correctly shows that the latter was followed by
a business depression that had already been fore-
shadowed in the downward stock market movement.
If all panics and industrial crises arose from the
same causes and could be predicted with the suggested
rythmical certainty, they would never happen because
they would always be foreseen. This sounds some-
thing like an Irish "bull," but it may well stand as a
statement of the fact. Was it not an Irishman who
said that an Irish bull differed from other bulls in the
respect that it was always pregnant? I do not here
go deeply into this question of cycles, because it is
abundantly clear that the stock market is little moved
by any such consideration.

Order Is Heaven's First Law

If Wall Street is the general reservoir for the col-
lection of the country's tiny streams of liquid capital,
it is the clearing house for all the tiny contributions to
the sum of truth about the facts of business. It cannot
be too often repeated that the stock market movement
represents the deductions from the accumulation of
that truth, including the facts on building and real
estate, bank clearings, business failures, money condi-
tions, foreign trade, gold movements, commodity
prices, investment markets, crop conditions, railroad
earnings, political factors and social conditions, but all
of these with an almost limitless number of other
things, each having its tiny trickle of stock market

It will be seen from this how true the postulate
made in an earlier discussion was when it was said
that nobody in Wall Street knows all the facts, to say
nothing of the meaning of all the facts. But the
impartial, passionless market barometer records them
as certainly as the column of mercury records the
atmospheric pressure. There is nothing fortuitous
about the stock market movement, and I think I have
shown that it cannot to any profitable extent be per-
verted to the ends of deception. There must be laws
governing these things, and it is our present purpose
to see if we cannot formulate them usefully. Many
years ago George W. Cable said: "What we call
chance may be the operation of a law so vast that we
only touch its orbit once or twice in a lifetime." There


is no need to lose ourselves in the mazes of predestina-
tion and foreordination, or reduce the Westminster
Confession to absurdity by saying that life is just one
damned thing after another. But we shall all recog-
nize that order is Heaven's first law, and that organ-
ized society, in the Stock Exchange or elsewhere, will
tend to obey that law even if the unaided individual
intelligence is not great enough to grasp it.

Chapter VII


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 occa-
sional suspension by a secondary rally or reaction, as
the case may be; and the incalculable, and for our pur-
poses largely negligible, daily fluctuation. We can
satisfy ourselves from examples that a period of trad-
ing within a narrow range what we have called a
"line" gaining significance as the number of trading
days increases, can only mean accumulation or distribu-
tion, and that the subsequent price movement shows
whether the market has become bare of stocks or satu-
rated with an oversupply.

True to Form

But 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 use-
fulness. It is then fulfilling its true function of pre-
diction. It is telling us not what business is to-day but

what the future course of business will be. News

known i_nffis_discounted. What everybodyJaiQws-
has ccascd_to_be a market factor, except in fhp rare
instance_of a panic^, when the stock markt-is con-
fessedly taken by surprise.

When these articles appeared in serial form in Bar-
ron's, the national financial weekly, I included the fol-
lowing inference, based upon the reading of our
barometer, on September 18, 1921, the date when the
quoted paragraph was written. It appeared on No-
vember 5, 1921. It was no guess, but a scientific deduc-
tion 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 unprin-
cipled 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

At 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
2 ist, after a remarkable continuance of the line of
probable accumulation in the railroad stocks and a con-
firmatory 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. To-day all the bear factors are
known, serious as they admittedly are. But the stock market
is not trading on what is common knowledge to-day but upon
the sum of expert knowledge applied to conditions as they can
be foreseen many months ahead."

Henry H. Rogers and His Critics

Here 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, inci-
dentally, the price of gasoline. Perhaps these news-
paper 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

A Speculator's Reasoning

Assumption of an unfair advantage for the profes-
sional is absolutely baseless. The reasoning of a pro-
fessional like Jesse Livermore is merely the reasoning
presented in this and preceding articles, backed by a
study of general conditions. He said on October 3,
1921, that he had been buying, and, giving him the
credence of ordinary courtesy for such a voluntary


statement, it is clear that he was trying to shape in
his own mind what the investing and speculating public
would think at a date as far ahead as he could see.

This is not manipulation. These speculators are
not creating any false market or deceptive appearance
of activity to lure the public into the game, like the
"barker" outside a Midway show. On October 3d
Jesse Livermore was quoted in the columns of Bar-
ron's as saying that "all market movements are based
on sound reasoning. Unless a man can anticipate
future events his ability to speculate successfully is lim-
ited." And he went on to add: "Speculation is a
business. It is neither guesswork nor a gamble. It is
hard work and plenty of it."

Dow's Clear Definition

Let us compare this with the words of Charles H.
Dow in The Wall Street Journal twenty years before.
In the editorial of July 20, 1901, he said:

"The market is not like a balloon plunging hither and thither
in the wind. As a whole, it represents a serious, well-consid-
ered effort on the part of farsighted and well-informed men to
adjust prices to such values as exist or which are expected to
exist in the not too remote future. The thought with great
operators is not whether a price can be advanced, but whether
the value of property which they propose to buy will lead invest-
ors and speculators six months hence to take stock at figures
from ten to twenty points above present prices."

Observe how the none too deftly expressed thought
of Livermore parallels the more perfectly shaped defi-
nition of the detached and dispassionate Dow. Bcr-


nard M. Baruch, after the war, gave evidence before
a Congressional committee as to a market operation

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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 4 of 20)