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From The Stock Market Barometer by William P. Hamilton, published in 1922
Continued from...The Advantage of Wall Street Professionals
Selling Commodities ShortA bear has few friends, because obviously he cannot make money unless other people lose it. It is curiously illogical that this feeling against him extends even to the cases where he forsakes stocks for operations on the short side in commodities like wheat or cotton. But there is nothing incompatible with a bull position in stocks and a bear position in wheat. There is nothing antagonistic to the greater prosperity of the country in believing that such prosperity will be enhanced if the humble consuming worker can get more flour or bread at lower prices. It would be utterly impossible to synchronize the movements of wheat or cotton with those of stocks. These commodities often decline when securities are advancing. It is not the general opinion, but it seems to me that a bear of wheat who breaks a corner in that commodity, even if his end is selfish, is performing something in the nature of a public service.Such an opinion as this, of course, will be unpopular
with the farmer and still more unpopular with the farmer's political friends,
to whom wheat at $5 a bushel looks like prosperity, with wealth beyond
the dreams of avarice. It might well mean famine and widespread destitution.
The farmer and his friends have become sensitive since their own wheat
pool (not different morally from any other attempted corner in the staff
of life), formed in 1919 to carry the price of wheat above $3 a bushel,
collapsed under the futile leadership of the Non-Partisan League and the
moral support of some of the members of what now constitutes the agricultural
"bloc" in the United States Senate. That corner failed, and it is no unkindness
to the farmer to say that it deserved to fail. The stock market of 1920
was warning him that such a pool could not succeed, in ample time for him
to have realized all his wheat at prices well over $2 a bushel.
How the Barometer Adjusts ItselfWe are not wandering from our text. Weakness in the cotton or grain markets may have much to do with secondary reactions in the stock market, if only for the financial commitments involved. Secondary movements, indeed, are influenced by much more transitory conditions than any of those which govern the major swing. The question is pertinently asked, "Do the averages predict a secondary reaction in any dependable way?" There would be such a prediction, naturally, if, in the course of a major bull swing, the market made a line in both averages, and then a price below the line to indicate that saturation point had been reached; and the converse would be true in a bear market. But experience tells us that when the line occurs it is, generally, not before but after a secondary break or rally. This line, then, is most useful to the speculator who has previously sold and wants to get into the market again, because a bull indication after a line of accumulation would point the way to a new figure higher than that from which the secondary decline took its origin. Such a new top would be conclusive evidence, on all our records, that the bull movement had been resumed.But these discussions are designed less for speculators
than for those who wish to study the stock market barometer as a guide
to the general business of the country. These students may well ask what
is the real purpose and usefulness of the secondary movement. If we are
allowed to mix our metaphor, it may be said that the secondary movement
is not unlike a device sometimes used for adjusting compasses. Many of
you have seen a ship's launch describing circles in the harbor, and wondered
what it meant. I am well aware that the metaphor is anything but perfect,
but it is clear that the secondary movement serves the valuable purpose
of correcting our barometer. Our guide is, to that extent at least, self-adjusting.
Remember that we are dealing with no such certain element as the mercury
in the tube, whose properties we know about. The stock market. barometer
is taking every conceivable thing into account, including that most fluid,
inconstant and incalculable element, human nature itself. We cannot, therefore,
expect the mechanical exactness of physical science.
Not Too Good to Be TrueWe might well be disposed to suspect our barometer if it were too exact. Our attitude would be that of a city magistrate toward police evidence, when every police witness tells exactly the same story in the same words. Such evidence is altogether too good to be true. I am repeatedly asked if I am quite sure about the low or high point of a given turning date; whether, for instance, the low of the bear market from which we are now emerging was really June, 1921, or should not be considered in relation to the new low point, scored by the industrials alone, in the following August. It has been said that the averages must confirm each other, but if you like to take it that way and it suits your habit of mind, by all means allow yourself that much latitude. I cannot see that it makes any material difference. I have been shown figure charts where bear and bull movements, from the course of a single constantly active stock like United States Steel common, were professedly predicted with mathematical exactness. They have not inspired me, and I do not believe that they could stand the long years of test to which our barometer has been subjected.There are other critics, far less kindly and with no real desire to help, who find no difficulty in picking holes in our theory because they do not wish to be convinced. They are merely contentious. They can, of course, find plenty of movements, especially secondary ones, which they think the barometer failed to forecast. What of it? An instrument of any such accuracy as they demand would be a human impossibility, and indeed, I do not think that any of us, in the present stage of man's moral development, could be trusted with such a certainty. One way to bring about a world smash would be for some thoroughly well-intentioned altruist to take the management of the planet out of the hands of its Creator.
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From The Stock Market Barometer by William P. Hamilton, published in 1922
| Nature and Uses of Secondary Swings | The Advantage of Wall Street Professionals | Short Selling and the Secondary Movement |