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Continued from...1909, and Some Defects of History
In past discussions of the stock market barometer
- the record by daily averages of the closing "bid" prices of a number
of selected industrial and railroad stocks, taken in two separate groups
to check and confirm each other - emphasis has been laid upon what is called
a "line". It is needless to say that no inference of value can be drawn
from a single day's tradiing. However large the transactions may be, they
cannot show the general trend. This daily fluctuation is merely the third
and least important movement defined in Dow's theory of the averages. If
we could imagine such a thing as an irregular daily tidal movement it is
just that. The general level of the sea is not changed by an abnormally
high tide in the Bay of Fundy or a tidal bore in the mouth of some Chinese
river. The ocean's real encroachments and recessions take time.
A DefinitionThe line, therefore, may be considered as often preceding an appreciable recovery in a primary bear market or a well-defined reaction in a primary bull market, and, rarely, as the possible turning of a major movement. It can almost be set down as axiomatic for all our purposes that a line is and must necessarily be either one of accumulation or one of distribution. For a time the buying and selling power are in equilibrium. There are some most significant lines in the history of the averages to which reference has already been made.Predicting the WarTo show the special value of the averages as a barometer, forecasting what even Wall Street itself does not know, in any general sense or at any rate does not realize, the extraordinary line made by both averages, industrials and railroads, in the months of May, June and July, 1914, preceding the outbreak of the Great War, is here submitted. No severer test of the averages could be chosen. The war came as a surprise to the whole world. Did the stock market foresee it? It may be fairly claimed that it did, and had predicted it, or trouble of the most momentous character, before the end of July, while the German army crossed into Belgium on August 3rd-4th.Let it be remembered that a primary bear movement
had then been in progress in the stock market since October, 1912. In May,
1914, both averages started to make a line of unusual length. The fluctuations
in the railroads were between one hundred and three and one hundred and
one, and in the industrial between eighty-one and seventy-nine. Only once,
on June 25th, did the railroads give a warning at one hundred. This was
taken back the following day with a continuance of the line in both averages
up to July 18th in the case of the railroads and July 27th in the case
of the industrials. At the latter date, eight days before the German army
invaded Belgium, the industrials confirmed the warning the railroads had
given.
Definition of a "Line"The accompanying figure chart, taken from May 1, 1914, to July 30th, answers many questions. The line, like others recorded in the averages, was presumably one of accumulation or distribution. At the end, of April the bear market had continued for nineteen months, and there is fair conjecture that had there been no war this would have proved a line of accumulation, followed by the bull market which actually started in the ensuing December, soon after the Stock Exchange reopened for business.This chart answers also the questions as to the dimensions or breadth of a line, which, of course, in theory may be prolonged indefinitely and in this instance had actually extended over sixty-six trading das in the industrials and seventy-one in the railroads. It will be seen that three points was the extreme range in the iinclustrials and four points that in the more stable railroad stocks. The line proved to have been one of distribution, and indeed the market had become so saturated with stocks that the Stock Exchange closed its doors for the first time since the gold panic of 1873. Railroads
Railroads chart May to July 1914.
Chart image created by Pandacash (not in William Hamilton's original book).
Industrials
What Had Happened?What had happened? German holders of American stocks and the best informed European bankers had sold in this market. If there had been no war all this would have been absorbed by the American investor at the unrepresentative low prices prevailing in a bear market which in July, 1914, had been operative for twenty-two months. All of it was absorbed by the American investor in the following year. The supply from Europe then, and subsequently, as the war forced foreign holders to realize, and war loans compelled the liquidation of other investments, took the plate of the normal supply of new investment securities which it is the duty of Wall Street to create through concentration of opportunity and of savings and the bringing of the two things together. Over-regulation of the railroads, now recognized to have been an economic crime, had paralyzed their power to create new capital long before the war. The publtc attention had been diverted for five years before that calamity to industrial opportunity, some of it, like the shady oil promotions of our inflation period, of a dangerously speculative character. Without the foreign sales of American securities and the war, turning us in effect from a debtor to a creditor nation, there would have been a dearth of capital opportunity and this is why after the all-revealing break late in July the market made only a relatively small decline on the reopening of the Stock Exchange, in December, immediately swinging into one of its great bull periods.Relation to VolumeKnowledge is valuable not merely for telling us what to do but for telling us what to avoid. Inside information, so called, is a dangerous commodity in Wall Street, especially if you trade upon it, but at least it guards you against the rumors which cannot possibly be so. Diligent study of the averages will sufficiently show where a, "line", having proved to be one of accumulation, has given definite information, not merely useful to the trader but valuable to those who look upon the stock market as a means of fore casting the trend of the country's general business.Here is an appropriate opportunity for adding something
about volume of sales. This volume is much less significant than is generally
supposed. It is purely relative, and what would be a large volume in one
state of the market supply might well be negligible in a greatly active
market. If the line means absorption, this absorption sums up the market
supply, whether it be three hundred thousand shares or three million. Showers
of rain vary in intensity, area and duration. But they all result from
the moisture in the air reaching saturation point. Rain is rain whether
it covers a county or a state, in five hours or five days.
How to Know a Bull MarketIt might well be asked, how are we to tell when a secondary swing, upward for instance, has developed into a primary bull market? The result is seen in the averages in a succession of zig-zag steps. If the secondary swing reacts a little after what would ordinarily be its culmination in a primary bear .market but does not decline to the old low figures,and subsequently recovers to points better than the new high established on the earlier rally, we may assume with confidence that a primary bull market of indefinite length has been established. It is, of course, impossible for the barometer to predict the duration of the movement, any more than the aneroid can tell us on October 30th what the weather will be on Election Day.Barometrical LimitationsThere is no need to expect omniscience from an aneroid barometer, which, as we know, frequently takes back its predictions and would be a most untrustworthy guide for the mariner if it did not. This is true of the stock market barometer, which must be intelligently read. Surgeons and physicians in our time have been greatly helped, to the lasting advantage of human life and comfort, by the X-ray photograph. But these medical men will tell you that the photograph itself must be read by an expert; that to the mere general practitioner not accustomed to its frequent use it may be unintelligible or misleading. The results of an X-ray to disclose, for instance, pyorrhea "pockets" at the roots of the teeth would be meaningless to the layman and perhaps even to some dentists. But any dentist could qualify himself to read those indications, and it is here submitted that any intelligent laymen with a sympathetic interest in the stock market movement, by no means necessarily speculative, can read the stock market barometer.
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From The Stock Market Barometer by William P. Hamilton, published in 1922
| A "Line" and an Example - 1914 | Speculation and the Importance of Sentiment in the Stock Market |
