Prediction of the Recovery into a Bull Market

Continued from...Forecasting a Bull Market - 1908-1909.

A Courageous Prediction

Returning to the bull market of 1908 and 1909, which The Wall Street Journal was evidently beginning to foresee, on December 25, 1907, that newspaper said, "We have seen the low price for the 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 certificates were a vivid reality, The Wall Street Journal, manifestly judging by the barometer alone, was able to record a significant rally. Speaking of this preliminary movement, it says that it gives "the impression 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 the wish is father to the thought. We have all heard that when the neophyte meddles with the magician's wand he is apt to raise the devil.

Reviewing the Collapse

Prediction was anything but a comfortable task in the beginning of a bull market which nobody at that time would concede, much less forecast with any degree of certainty. In an earlier chapter of this series great stress was laid on the suddenness with which business collapsed in 1907. The Wall Street Journal recalls the conditions, and the startling change, in its editorial of January 24, 1908:

"Consider, for instance, the rapidity with which the pendulum of business has swung in this country from extreme prosperity to great prostration. Almost in a single night the situation changed from one extreme to another. Even after the panic had swept through Wall Street with terrific force a high official of a leading railroad commented upon the fact that the traffic of his line had the day before touched high-water mark. Three weeks later the same official reported that the business of the line had fallen off abruptly. Anecdotes of this kind could be multiplied indefinitely.

It is only three months since the panic started in Wall Street, and yet that time has been sufficient to produce what amounts to a revolution in the economic conditions of the country. Three months ago there were not cars enough to move the freight. Now there are several tens of thousands of empty freight cars on the sidings and in the terminals. Three months ago the iron and steel trade was at the very height of its activity. It took only five or six weeks to cut off the demand And to close mills. If a chart were drawn to describe the reduction in iron and steel production in the past ten weeks, it would make almost a perpendicular line, so sudden and extreme has been the contraction."

A Bull Market Recognized

These extracts could be supplemented by and contrasted with the uniformly bullish inferences drawn from the stock market barometer during the winter and spring of 1908, when the business of the country was, apparently, in the deepest stage of depression. The depression was recognized; but the fact that the stock market was acting not upon the things of the moment but upon all the facts, as far ahead as it could see them, was never allowed to become obscure. It will be seen that The Wall Street Journal set forth the known facts in the paragraphs quoted above. A well-known chart showed its lowest point of depression at that time and did not cross its medial line, to begin its ensuing area of expansion, until the following November. But the stock market anticipated that record by a clear twelve months, and the faithful barometer predicted the recovery when there was apparently not a patch of clear sky on the horizon.

Reprobating the "Frivolous" Recovery"

Looking back on those days of early responsibility, it is matter of thankfulness to me to have had Dow's sound theory to back me in the face of unbelievably virulent criticism. In the mind of the demagogue Wall Street can never be forgiven for being right when he is, wrong. The country at that time was full of all kinds of agitation for the curbing, controlling, regulating and general bedeviling of business. Discontent was general, and it was a winter of unemployment. Some of the letters received, in which this bullish attitude of the stock market was denounced in the most unmeasured terms, would sound funny now, although they were anything but funny then. We seemed to be in the position of the "coon" at the country fair who Pelts his head through a hole in a sheet as a target for those willing to pay their nickels for the privilege of a-shot at him. The lightest accusation was that Wall Street was "fiddling while Rome was burning." The general charge took the form that guilty manipulation by gamblers was in progress.

If you will refer back to the twenty-five-year chart published with an earlier discussion you will note that the recorded sales at that time were the lowest since 1904, indicating a market so narrow that manipulation would have been wasted even if it had been possible. But that charge is always made in a bear market and in the transition period between a major decline and its succeeding upward movement. If I had not already advanced so many arguments to prove what an inconsiderable factor manipulation really is, the volume of sales itself would be sufficient to make my point. But these sturdy protestants thought otherwise, and continued to fill my wastebasket with revilings for many months to come. For a time at least, a bull market was positively unpopular.

Previous...Forecasting a Bull Market - 1908-1909. Next...Trading Volume and Direction of Stock Market Averages.

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