A Bull Market Forecast

Continued from...Buying Stocks on Values.

A Cautious but Correct Forecast

No severer test could be taken than the interpretation of the averages in what might almost be called the transition period between a bear and a bull market. The bear market which developed from September, 1902, saw its low points in the September of the following year, and it is weeks or even months afterwards before the change in the major swing can be definitely asserted. But on December 5, 1903, The Wall Street Journal, after a review of the fundamentally sound tendency of business in then recent years, said:

"Considering the extraordinary advance in wealth of the United States during that period, considering that railroad mileage has not increased in anything like the ratio of increase in surplus earnings, and finally considering that the ratio of increase in surplus earnings available for dividends has been at all times in excess of the rise in market prices and at the present time shows a larger percentage on market price than at any time since the former boom started, the question may well be asked whether the decline in stocks has not culminated. There is at least some evidence in favor of an affirmative answer to that question."

A Bull Market Confirmed

It would be easy to say that such an opinion could have been given without the help of the averages, but it was given with the price movement clearly in view and at a time when there was an easy possibility that the main bear movement might be resumed. It correctly foresaw the bull market, allowing for the caution necessary in such a prediction and, indeed, for the fact that analysis of the market movement was still in its infancy. The bull market then foreseen ran throughout 1904, and can be said to have terminated only in January, 1907. But some nine months after this editorial analysis of the business situation, judged by the averages, was written, The Wall Street Journal tackled the almost equally difficult question of whether the bull market then getting into full swing might be expected to continue. Remember that the advance had been running with moderate but increasing strength for twelve months, which would allow for at least some discounting in values. On September 17, 1904, The Wall Street Journal said:

"There is apparently nothing in sight to lead one to believe that railroad values are not on the whole maintaining their high position, and that as time goes on this will bring a further appreciation of prices. Much will depend on the coming winter, which will at all events bring a clear indication of the general trend of values. In the long run values make prices. It is safe to say that if present values are maintained, present prices are not on an average high enough.

It must further be remembered that the continued increase in the production of gold is a most powerful factor, which cannot fail to be felt in the future as making for higher prices of securities other than those of fixed yield."

A Vindication of the Theory

Note carefully that last line. We have satisfied ourselves that bonds held for fixed income decline when the cost of living rises, and more gold means that the gold dollar will buy less because gold is the world's accepted standard of value. But it stimulates speculation, and the stock market had seen this in 1904 when this was written, even if the houses with bonds to sell thought it rather "unclubby" to say anything which would disturb their business. Of course, these quotations are far from dogmatic, because Dow's Theory was only beginning to be understood. We shall see as the years went on that the theory allowed for much more explicit statements of the market's condition and its prospects. It is sufficient to record how soon the stock market barometer proved its usefulness when Dow's sound method of reading it had been set forth.

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