G e4jJ ^ot THE STOCK MARKET BAROMETER THE STOCK MARKET BAROMETER A Study of Its Forecast Value Based on Charles H. Dow's Theory of the Price Movement. With an Analysis of the Market and Its History Since 1897 By WILLIAM PETER HAMILTON Editor of The Wall Street Journal HARPER y BROTHERS PUBLISHERS NEW YORK AND LONDON THB STOCK MARKET BAKOMETEB Copyright, 1922 By Harper & Brothers Printed in the U. S. A. First Edition B-W To My Old Friend and Colleague HUGH BANCROFT without whose suggestion and encouragement this book would not have been written LIST OF CONTENTS CHAPTER I. CYCLES AND STOCK MARKET RECORDS i II. WALL STREET OF THE MOVIES 9 III. CHARLES H. Dow, AND His THEORY 21 IV. Dow's THEORY, APPLIED TO SPECULATION 30 V. MAJOR MARKET SWINGS 4 VI. A UNIQUE QUALITY OF FORECAST 49 VII. MANIPULATION AND PROFESSIONAL TRADING 60 VIII. MECHANICS OF THE MARKET 73 IX. "WATER" IN THE BAROMETER 87 X. "A LITTLE CLOUD OUT OF THE SEA, LIKE A MAN'S HAND" 1906 101 XI. THE UNPUNCTURED CYCLE 115 XII. FORECASTING A BULL MARKET 1908-1909 128 XIII. NATURE AND USES OF SECONDARY SWINGS 142 XIV. 1909, AND SOME DEFECTS OF HISTORY 154 XV. A "LINE" AND AN EXAMPLE 1914 172 XVI. AN EXCEPTION TO PROVE THE RULE 185 XVII. ITS GREATEST VINDICATION 1917 196 XVIII. WHAT REGULATION DID TO OUR RAILROADS 208 XIX. A STUDY IN MANIPULATION 1900-1 221 XX. SOME CONCLUSIONS 1910-14 237 XXI. SOME THOUGHTS FOR SPECULATORS ,... 250 APPENDIX: RECORD OF THE DOW-JONES AVERAGES 269 PREFACE A preface is too often an apology, or at best an explanation of what should be sufficiently clear. This book requires no apology, and if it fails to explain itself the fault is that of the author. But acknowl- edgment must be made most gratefully to Clarence W. Barren, president of Dow, Jones & Co., and to Joseph Cashman, manager of that great financial news service, for permission to use the indispensable Dow-Jones stock-price averages, and to my old com- rade in Wall Street newspaper work, Charles F. Renken, compiler of those averages, for the charts here used in illustration. W. P. H. THE STOCK MARKET BAROMETER THE STOCK MARKET BAROMETER Chapter I CYCLES AND STOCK MARKET RECORDS AN English economist whose unaffected humanity XJL always made him remarkably readable, the late William Stanley Jevons, propounded the theory of a connection between commercial panics and spots on the sun. He gave a series of dates from the beginning of the seventeenth century, showing an apparent coinci- dence between the two phenomena. It is entirely human and likable that he belittled a rather ugly com- mercial squeeze of two centuries ago because there were not then a justifying number of spots on the sun. Writing in the New York Times early in 1905, in com- ment on the Jevons theory, I said that while Wall Street in its heart believed in a cycle of panic and pros- perity, it did not care if there were enough spots on the sun to make a straight flush. Youth is temerarious and irreverent. Perhaps it would have been more polite to say that the accidental periodic association proved nothing, like the exact coincidence of presi- dential elections with leap years. Cycles and the Poets Many teachers of economics, and many business men without pretension even to the more modest title 2 THE STOCK MARKET BAROMETER of student, have a profound and reasonable faith in a cycle in the affairs of men. It does not need an under- standing of the Einstein theory of relativity to see that the world cannot possibly progress in a straight line in its moral development. The movement would be at least more likely to resemble the journey of our satellite around the sun, which, with all its planetary attendants, is moving toward the constellation of Vega. Certainly the poets believe in the cycle theory. There is a wonderful passage in Byron's "Childe Harold" which, to do it justice, should be read from the preceding apostrophe to Metella's Tower. This was Byron's cycle : "Here is the moral of all human tales, 'Tis but the same rehearsal of the past; fails First freedom and then glory ; when that Wealth, vice, corruption, barbarism at last, And history, with all her volumes vast, Hath but one page." There seems to be a cycle of panics and of times of prosperity. Anyone with a working knowledge of modern history could recite our panic dates 1837, 1857, 1866 (Overend-Gurney panic in London), 1873, 1884, 1893, 1907, if he might well hesitate to add the deflation year of 1920. Panics, at least, show a vari- able interval between them, from ten to fourteen years, with the intervals apparently tending to grow longer. In a subsequent chapter we shall analyze this cycle theory, to test its possible usefulness. CYCLES AND STOCK MARKET RECORDS 3 Periodicity But the pragmatic basis for the theory, a working hypothesis if nothing more, lies in human nature itself. Prosperity will drive men to excess, and repentance for the consequence of those excesses will produce a corre- sponding depression. Following the dark hour of absolute panic, labor will be thankful for what it can get and will save slowly out of smaller wages, while capital will be content with small profits and quick returns. There will be a period of readjustment like that which saw the reorganization of most of the American railroads after the panic of 1893. Pres- ently we wake up to find that our income is in excess of our expenditure, that money is cheap, that the spirit of adventure is in the air. We proceed from dull or quiet business times to real activity. This gradually develops into extended speculation, with high money rates, inflated wages and other familiar symptoms. After a period of years of good times the strain of the chain is on its weakest link. There is a collapse like that of 1907, a depression foreshadowed in the stock market and in the price of commodities, followed by extensive unemployment, often an actual increase in savings-bank deposits, but a complete absence of money available for adventure. Need for a Barometer Read over Byron's lines again and see if the parallel is not suggestive. What would discussion of business 4 THE STOCK MARKET BAROMETER be worth if we could not bring at least a little of the poet's imagination into it? But unfortunately crises are brought about by too much imagination. What we need are soulless barometers, price indexes and averages to tell us where we are going and what we may expect. The best, because the most impartiaf, the most remorseless of these barometers, is the recorded average of prices in the stock exchange. With varying constituents and, in earlier years, with a smaller number of securities, but continuously these have been kept by the Dow-Jones news service for thirty years or more. There is a method of reading them which has been fruitful of results, although the reading has on occa- sion displeased both the optimist and the pessimist. A barometer predicts bad weather, without a present cloud in the sky. It is useless to take an axe to it merely because a flood of rain will destroy the crop of cabbages in poor Mrs. Brown's backyard. It has been my lot to discuss these averages in print for many years past, on the tested theory of the late Charles H. Dow, the founder of The Wall Street Journal. It might not be becoming to say how constantly helpful the analysis of the. price movement proved. But one who ventures on that discussion, who reads that bar- ometer, learns to keep in mind the natural indignation against himself for the destruction of Mrs. Brown's cabbages. Dow's Theory Dow's theory is fundamentally simple. He showed that there are, simultaneously, three movements in CYCLES AND STOCK MARKET RECORDS 5 progress in the stock market. The major is the pri- mary movement, like the bull market which set in with the re-election of McKinley in 1900 and culminated in September, 1902, checked but not stopped by the famous stock market panic consequent on the Northern Pacific corner in 1901; or the primary bear market which developed about October, 1919, culminating June-August, 1921. It will be shown that this primary movement tends to run over a period of at least a year and is generally much longer. Coincident with it, or in the course of it, is Dow's secondary movement, represented by sharp rallies in a primary bear market and sharp reactions in a primary bull market. A striking example of the latter would be the break in stocks on May 9, 1901. In like secondary movements the industrial group (taken separately from the railroads) may recover much more sharply than the railroads, or the railroads may lead, and it need hardly be said that the twenty active railroad stocks and the twenty industrials, mov- ing together, will not advance point for point with each other even in the primary movement. In the long advance which preceded the bear market beginning October, 1919, the railroads worked lower and were comparatively inactive and neglected, obviously be- cause at that time they were, through government ownership and guaranty, practically out of the specu- lative field and not exercising a normal influence on the speculative barometer. Under the resumption of private ownership they will tend to regain much of their old significance. 6 THE STOCK MARKET BAROMETER The Theory's Implications Concurrently with the primary and secondary move- ment of the market, and constant throughout, there obviously was, as Dow pointed out, the underlying fluctuation from day to day.