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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word approaches the subject. The ten-year interval
between the British crisis of 1804-5 and our own of
1814 might stimulate him at first. And the really
serious and nation wide crises of 1837 anc ^ l %57 would
give him a great deal of confidence. He would recall
the ten-year intervals of Jevons, and that we had up
to 1837 recorded four crises of sorts, in four decades
of the new century. We did not greatly share the
panic in Europe in 1847, although it was sufficiently
serious there to impress itself upon American memory.
But when the cycle enthusiast found a real panic in
1857, ne cried u Aha ! We have now discovered the
secret. There is a twenty-year cycle, with a big crisis
at each end, and a little crisis in the middle. We may
now confidently set about humoring the facts to fit
this beautiful theory."

Misfitting Dates

On that showing there should have been another
first-class panic, with nation wide consequences, in
1877. But apparently the machinery slipped a cog, for
the panic came in 1873. From the devastating folly
of the Sherman Silver Purchase Act, it would have
come in 1872 but for the accident that we had in that
year an enormous wheat crop, which brought splendid
prices in the world market because of the almost total
crop failure in Russia. Here, then, was a contraction


of the interval between great crises. The twenty-year
theory was deflated to sixteen, and it is hard to derive
much consolation from the fact that the Overend-
Gurney failure in London in 1866 had marked a date
conveniently between the two great crises. The Lon-
don panic of 1866 was accompanied by a heavy fall
in prices in our Stock Exchange. In April of that
year there was a corner in Michigan Southern and
rampant speculation. The truthful but cautious Dow
says that the relapse from this "was rather more than

But the three panic years 1873, 1884 and 1893 did
something to revive the confidence of the ten and
twenty-year theorists. The first and the last were
crises of almost world wide magnitude and equally far-
reaching consequences. Our cyclists said: "That slip-
up in the reduction to sixteen years for the interval
between crises occurring in 1857 an d ^73 was merely
fortuitous, or at least we shall be able to explain it
satisfactorily when we have deduced only a little more
about the laws which govern these things." And the
twenty-year cyclists prophesied, saying: "There are
twenty years between 1873 and 1893. Our barom-
eter is getting into shape. There will be a minor crisis
round about 1903 and a major panic in 1913, or not
later than 1914."

Lost in Transit

What is the use of the theory, indeed, unless it can
be made the basis for at least as much prophecy as
that? But between 1893 and 1907 we have an interval


of fourteen years. Has the twenty-year period con-
tracted, or the ten-year period expanded, to fourteen
years? Is there any dependable periodicity about the
thing? We see that there was not the slightest reason
for any crisis in the years presumably anticipated by
the cycle theorist 1903 or 1913. Indeed, the vol-
ume of the world's speculative business was not large
enough to make a crisis in those years. It is reason-
ably certain that a smash cannot be brought about
unless an edifice of speculation has been constructed
sufficiently high to make a noise when it topples over.
What is the value of all this as a forecast for busi-
ness? I cannot see that it has any. The theory has
to make so many concessions takes so much humor-
ing, in fact that it ceases to have more than a value
for record. We see that the sweeping conclusions
based upon the cycle assumption had to be changed
again and again. Does much that is really useful
remain? I am anything but a sceptic; but this whole
method of playing the cycles looks to me absurdly
like cheating yourself at solitaire. I can understand
stringent rules, arbitrary rules, unreasonable rules,
in any game. But my mind fails to grasp a game
where you change the rules as you go along.

Are They Equal?

And what becomes of that imposing premise that
"action and reaction are equal?" Are they? There
is little real evidence to prove the assumption, in
recorded human affairs. Of course the holders of that


theory may respond, "Well, if they are not equal they
ought to be." I cannot even see why they ought to be.
Certainly, holding a Christian faith in the perfectibil-
ity of human nature, I do not see why crises should
not be eliminated altogether. It is easy to see how
the periods between them at least seem to have grown
longer. The interval between 1893 and 1907 was
fourteen years, and 1920 was no panic year.

Unless we are to force the construction of what
constitutes a panic until we actually distort it, we can
hardly regard the deflation liquidation of 1920 as a
typical crisis. It could not begin to compare with the
damaging effects of 1893, 1873, 1857, or 1837. It had
none of the earmarks of a panic year. I dare say I
shall believe, in five years' time, that the drastic con-
traction and deflation were about the best thing that
could have happened to us. They should certainly
discount all sorts of trouble in the future.

A Business Pathology Needed

There must be some sort of scientific pathology of
business affairs, or perhaps it might be better to call
it morbid psychology. I have suggested in another
chapter how utterly inadequate the records of history
are in the vital matter of commerce and all that con-
tributes to it. But we are beginning to 1 acquire a
scientific knowledge of the symptoms of the diseases
which afflict it. In this respect we have probably made
more advance in the past quarter of a century than in
all the years since Carthage sold the purple weaves


of Tyre to Rome. We may well hope that we are de-
veloping a scientific method of diagnosing the symptoms
of business disease. There was no such method in 1893,
bcause there were no such records as we have today.

But why need we assume that once every ten years
or twenty years, or any other period, the most intelli-
gent part of mankind loses its head and forgets all
the lessons of the past? One thing is certain about a
panic. It could never occur if it were foreseen. Are
we not working toward a sum of knowledge and an
accuracy of analysis which will, in a sufficiently safe
measure, foresee all but the non-insurable risks "the
act of God and the King's enemies?"

The Federal Reserve Safeguard

I can see a great deal too much politics, and many
defects, in the Federal Reserve banking system. But
under that system it is hard to imagine a set of con-
ditions which would force the country to resort once
more to clearing-house certificates, as it did in 1907
and 1893. It would pass the wit of man to devise a
perfect banking system; and what would seem perfect
to one would appear utterly inadequate to another.
But the progress from the old national banking system
to the Federal Reserve system represents the most
tremendous stride in business practice which the coun-
try has ever seen. Is not the Reserve system itself an
entirely new factor for the cycle theorist to consider?

It must not be assumed for a moment that possible
crises in the future may be dismissed from considera-


tion. On the contrary, they are certain to come. But
may we not hope that, with fuller knowledge, they
will be at least in part anticipated and, in their most
dangerous effects, radically mitigated?

Teaching the Teacher

If these studies have shown the man who takes an
intelligent, even if not a financial interest in Wall
Street, that knowledge will protect him there as it
will anywhere else, the educational design has been
largely accomplished. Certainly one of the desirable
educative services of this series has been to show the
writer how much there was about the stock market
movement which he had never before formulated to
himself in any useful fashion. The way to get at the
essence of such a proposition is pragmatic to live
with it from day to day. The stock market problem,
considered in the light of Dow's Theory, is essentially
simple. It can be set forth in a thoroughly useful way,
provided only that the teacher is neither a crank nor
a quack, a gambler or a crook. Harvard University
is performing a greatly needed service in putting out
tabulations and index charts on general business con-
ditions which are above suspicion. The compilers have
not tied themselves down to dangerous assumptions.
They are not lashed to an assumed "medial line" of
national wealth with a constant upward tendency at
the same rate of speed in good times or bad, which
loses its certainty in face of the grim facts of war,
and hysterically changes its course.


Does the Physical Law Apply?

Such a system as that of Harvard University is not
committed to the proposition that in human affairs
action and reaction are equal. That is a fine-sounding
phrase, but it should require incalculably more evi-
dence than has yet been adduced to persuade us to
adapt a law of physics to something so unstable and
elusive as human nature, itself. Among the many
things which our stock market averages prove, one
stands out clearly. It is that so far as the price move-
ment is concerned action and reaction are not equal.
We do not have an instance of a bull market offset in
the extent of its advance by an exactly corresponding
decline in a bear market. And if this is true, as it
demonstrably is, about the extent of the price move-
ment in any given major swing, it is still more true
about the time consumed. We have seen that bull
markets are, as a rule, of materially longer duration
than bear markets. There is no automatically balan-
cing equation there. I do not believe there is such an
equation in human affairs anywhere. Certainly there
is none recorded in history. I am compelled to rely
upon others for tabular figure compilations of all
kinds, and do not profess to have used my modest
razor for the cutting of any of these tables of stone.
But in all the study of figures prepared for use in my
profession, I have been unable to find a balance of
action and reaction.


Extent and Duration Incalculable

Certainly the stock market barometer shows noth-
ing of the kind. There is no approximation to the
regularity of the pendulum, either in the arc of the
swing or its velocity. We see a bear market declining
forty points, a bull market advancing fifty points over
more than twice the period, a bear market declining
nearly sixty points, a bull market recovering forty-
five points, a bear market declining less than thirty
points, a major swing upward of not much more than
twenty points, a bull market advancing nearly sixty
points in the industrials with a simultaneous advance
of less than thirty in the railroads, and a different
period for each successive swing. This, in approxi-
mate figures, is the record for a quarter of a century.
There is, obviously, a rough periodicity about such
movements. But if we begin to twist them into some
mathematically calculable, regularly recurring "cycle,"
the next main movement, up or down, will leave us all
adrift, with nothing to hold on to but an empty theory
and an empty purse.

Sham Mysteries

I do not want to dogmatize about this, although I
am trying to make what is essentially a scientifically
treated subject popularly interesting, if, indeed, ser-
mons are ever popular. One trouble of all teaching,
and a moral danger to every teacher, is that the
authority necessarily accorded to the instructor leads
him to make something of a mystery of his trade. His


unconscious desire to eliminate embarrassing competi-
tion leads him to exaggeration of the difficulties to be
encountered in acquiring a sound knowledge of the
subject. In a brief time, as human affairs run, there
will be a sort of cult amplifying and complicating an
otherwise simple thesis. Every religion breeds a
priesthood, where sacerdotal succession becomes more
important, or at least much more jealously defended,
than mere salvation. Both in the English common
law and the canon law handicrafts were sometimes
referred to as mysteries. The plumber who comes
into your house likes you to believe that his elaborate
preparations, and the general mess he makes, are evi-
dence of the difficulty of the task he has accomplished
a difficulty you as a layman are entirely unable to
measure and a sufficient pretext for the extortionate
bill he renders.

Tipsters and Insiders

I have known some likable people connected with
what are frankly stock-tipping agencies. There is a
market for what they supply, and they are necessarily
excellent judges of human nature. They are never
bearish on the stock market. They are often success-
ful and prosperous in a bull market, and I suppose that
the savings of the fat years support them in the lean
ones. They tell the unscientific speculator what he
wants to know, but not what he needs to know. Some-
times the guessing is good, and always there is the sug-
gestion that there is a mystery about reading the stock


market movement. If this is true of what they teach
on the general market, it is still more true about indi-
vidual stocks. With them "insiders" are always buy-
ing. In my experience I have known many insiders,
and for every purpose of the small speculator they
were far oftener wrong than right.

As a matter of fact these so-called insiders, the real
men who conduct the real business of a corporation,
are too busy to spend their time over the stock ticker.
They are far too limited, too restricted to their par-
ticular trade, to be good judges of the turn of the
market. They are normally bullish on their own prop-
erty, in the respect that they believe it to be a growing
concern with great possibilities. But of the fluctua-
tions of business which will affect their stock, together
with the rest in the same group or all the other rail-
road and industrial stocks in the same market, their
view is singularly limited. It is not mere cynicism but
truth to say that sufficient inside information can ruin
anybody in Wall Street.

That is not only true, but it is an excellent thing that
it is true. Of course the executive officers of large
corporations should have a sound general knowledge
of conditions outside their own sphere. They should
be well instructed. They might read this book with
advantage, if it only taught them to take a more objec-
tive view. But even with the basis of a general educa-
tion, such as is required in a good university of the
man who intends afterwards to specialize in law or
surgery, their very occupation unduly affects their
sense of proportion.


Our Trustworthy Guide

This is why the stock market barometer is so valu-
able. It makes little of cycles or systems, interesting
and even well-grounded inferences or common fads.
It uses them all so far as they are useful, together
with every other scrap of information it is possible
to collect. The market movement reflects all the real
knowledge available, and every day's trading sifts the
wheat from the chaff. If the resultant showing of
grain is poor, the market reflects the estimate of its
value in lower prices. If the winnowing is good, prices
advance long before the most industrious and up-to-
date student of general business conditions can bushel
up the residue and set it forth in his pictorial chart.
Few of us can be Keplers or Newtons. But it is pos-
sible to formulate working rules which will help and
protect any man in that forecast of the future which
he must necessarily make every day of his life. This
is what the stock market barometer does. It makes
no false claims. It admits highly human and obvious
limitations. But such as it is, it can honestly claim
that it has a quality of forecast which no other busi-
ness record yet devised has even closely approached.

Chapter XII


CONTINUING the important and, indeed, vital
subject of the prediction value of the stock mar-
ket barometer, if we are to prove the validity of Dow's
theory of the price movement, the analyses of the'
stock market averages published at irregular periods in
The Wall Street Journal in 1907-8 may be here sub-
mitted. These are of record, and there is a personal
reason why they should have impressed themselves
upon my memory. At the end of the year 1907 the
late Sereno S. Pratt, a man of sound economic knowl-
edge, sterling character and exceptional ability as a
newspaper man, relinquished the editorial chair of
The Wall Street Journal for the dignified and less
exacting post of secretary to the New York Chamber
of Commerce.

Impersonal Editorials

Apart from the fact that they are not signed, news-
paper editorials have far less of any personal quality
than the public supposes or politicians assume. The
editor is, of course, personally responsible for them,
not only to the proprietors of the paper but civilly and
criminally under the law. His own editorials are
checked, when necessary, by the experts of the paper
who "cover" particular subjects, and what they write


A BULL MARKET 1908-1909 129

editorially is in turn subject to the editor's revision.
Several competent persons have seen and criticized an
editorial before it appears, in any well-conducted
paper. I succeeded Pratt at the beginning of 1908,
but it is impossible for me to say, even if the matter
were not in some degree confidential, to what extent
the editorial discussions of the averages were a matter
of individual thought, although the methods of an
editor unconsciously impress themselves upon his staff.
At any rate Pratt and I were of one mind in the
method of reading the averages which the paper had
inherited from Charles H. Dow, its founder.

Detecting the End of a Bear Swing

It will be remembered, from the preceding article,
that there was a short but severe major bear swing
lasting throughout 1907, really culminating on No-
vember 2 ist of that year. In the last week of Novem-
ber the industrial stocks rallied sharply, as they might
equally have done in a secondary upward swing in a
bear market; and the most difficult of all barometer
problems, that of calling the turn of the market, pre-
sented itself. On December 5th The Wall Street
Journal said:

"Since November 2ist, when the average price of twenty rail-
road stocks touched 81.41, its lowest point, there has been an
advance of 7.70 to 89.11, which was the record at the close of
yesterday's strong market. During these ten days there have
been only two days of decline. This is a very substantial rally,
and perhaps it is too rapid, all things considered, although it still


leaves prices on a basis which would seem to discount in large
part the reasonable trade contraction of the future."

On December 23d there was an incidental reference
to the averages in the discussion of the general devel-
opments of the week. The writer seems to have felt
rather than asserted the change, which it would have
been rash to predict, and said:

"It will be noticed that there has been quite a typical move-
ment of the average price of railroad stocks. It declined twenty-
six points from July 2Oth to November 2ist. It rallied nine
points in the following fortnight, reacted four points in the next
ten days, and has rallied two points in the past week. This is
really the shortened swing of the pendulum, as it approaches

A Self -Cor reeling Barometer

Before we go further it is necessary to say some-
thing about the secondary movement of which this
paragraph gives a simple, concrete instance, sufficient
for our present purposes. It will be observed that the
reaction following the rally from the low points of
the bear market was checked before it reached the old
low, and for purposes of record it may be said that
the movement of the twelve industrial stocks then used
in the average was roughly parallel and confirmatory.
Perhaps the last sentence in the paragraph quoted is
the most illuminating if it were intended to develop
in this article the meaning and function of the sec-
ondary swing. It may be said that in that way our
barometer tends to adjust itself. At the turn of a
bear market there is a chaos of knowledge of all kinds,

A BULL MARKET 1908-1909 131

and an almost inextricable confusion of opinion, which
is gradually resolving itself into order. It follows
that speculators and investors tend to anticipate the
market movement and often look too far ahead.

Right Too Soon

It would be possible to offer endless instances of
people who lost money in Wall Street because they
were right too soon. One illuminating instance occurs
to me as far back as the bull market which developed
in the summer preceding the re-election of McKinley
in 1900. One of the most conspicuous traders on the
floor then was a partner in an active arbitrage house
which has long since gone out of existence. For the
sake of the layman it may be explained that an
arbitrage house is (or was) one of those which did
business by cable exchange with the London market,
taking advantage of the fluctuating differences between
the prices in the forenoon on the New York Stock
Exchange and those in what at that time of our day
would be the afternoon in the London Exchange. But
in those dull summer days there was not enough busi-
ness for the arbitrage houses, or anybody else. The
total recorded transactions, which have in their time
exceeded three million shares a day, dwindled down
to considerably less than a hundred thousand.

Louis Wormser, however, was as active as a trader
could be on the floor in such circumstances. He was
bullish all through the summer. Other traders com-
plained that he went about spoiling what little market


there was in any stock which was momentarily active.
It is fair to say that he was entirely within his rights
as a floor trader and a member of the Exchange. The
market did not begin to gain strength or volume until
the last few weeks of the presidential campaign.
Wormser was then on the right side and followed the
market up. I suspect he even fancied he was leading
it. For three days after the election stocks were very
strong. They were so strong that he was convinced
the bull movement had sufficiently discounted the re-
election of McKinley. He turned bearish, and prob-
ably lost in a few days all he may have made on the
bull side in the preceding five months. That bull mar-
ket, as we have shown, did not culminate until Sep-
tember, 1902, in spite of the serious interruption of
the Northern Pacific corner and panic. This is an
excellent example of a speculator who saw only one
of the many factors where the market saw all of
them, and who was not content to trust the barometer.
It may, indeed, have been that Wormser's prominence
in a restricted market, a relatively large frog in a
small puddle, had given him the impression, by no
means singular, that he alone constituted the market,
as he sometimes had in the dull days preceding the rise.

A Courageous Prediction

Returning to the bull market of 1908 and 1909,
which The Wall Street Journal was evidently begin-
ning to foresee, on December 25, 1907, that news-
paper said, "We have seen the low price for the

A BULL MARKET 1908-1909 133

year in all probability." On January 10, 1908, when
the country was still quivering from the shock of the
developments of 1907, when the clearing-house certifi-
cates were a vivid reality, The Wall Street Journal,
manifestly judging by the barometer alone, was able
to record a significant rally. Speaking of this pre-
liminary movement, it says that it gives "the impres-
sion that it is one of those sharp fluctuations which
follow an extreme low point and precede, at greater
or less distance, a permanent turn in the tide." That
seems fairly courageous and clear as a prediction, and
one of exactly the conservative kind business men were
being led to expect from the general consideration of
the stock market barometer. Let us keep in mind
that Dow's theory is not a system devised for beating
the speculative game, an infallible method of playing
the market. The averages, indeed, must be read with
a single heart. They become deceptive if and when

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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 8 of 20)