The Stock Market Barometer, Chapter 12

Forecasting a Bull Market - 1908-1909

Continued from...Stock Market Periodicity and Inside Information

Continuing the important and, indeed, vital subject of the prediction value of the stock market 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 submitted. 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 knowledge, 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, newspaper 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 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 November 21st of that year. In the last week of November 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, presented itself. On December 5th The Wall Street Journal said:

"Since November 21st, when the average price of twenty railroad 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 developments 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 movemement of the average price of railroad stocks; It declined twenty-six points from July 20th to November 2lst. It rallied nine points in the fol1owing 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 equilibrium."

A Self-Correcting Barometer

Before we go further it is necessary to say something 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 secondary 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, 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 has 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 business 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 complained 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 probably lost in a few days all he may have made on the bull side in the preceding five months. That bull market, as we have shown, did not culminate until September, 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.

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From The Stock Market Barometer by William P. Hamilton, published in 1922