Next chapter of The Stock Market Barometer
NATURE AND USES OF SECONDARY SWINGS
BEFORE resuming the historical demonstration of the effectiveness of the stock market barometer which has been the subject of our most recent discussions, there is a good opportunity here for some consideration of the secondary swing. Previous discussions have shown how it was possible successfully to diagnose a major swing in its incipient stages. But the secondary movement postulated in Dow's Theory is a different matter. We have proved by analysis the correctness of the theory of the market as containing three distinct and, in a way, simultaneous movements the great primary swing up or down; the secondary movement, represented by reactions in a bull market and corresponding rallies in a bear market; and the daily fluctuation. It may be that this discussion will seem to be addressed more to the speculator or embryo investor than to those who consider using the stock market barometer as a guide and warning to business.
How to Call the Turn
It may be conceded at once tha if it is hard to call the turn of a great bear or bull market it is still harder to say when a secondary movement is due although
there are no insuperable difficulties in the way of showing the termination of the secondary movement and the resumption of the main market trend. We cannot Dogmatize abut the depth of such movements, in duration or extent. We have seen, from a study of what was really a secondary reaction in a bull market aggravated by the San Francisco calamity in 1906, that such a reaction can look deceptively like the real thing the development of a new major swing. It can look so vigorous and convincing, as in the case of the Northern Pacific panic of 1901, that even experienced traders will rashly assume that the bull market is over.
Dow estimated the length of a counter movement at from forty to sixty days, but subsequent experience has shown that this longer range is exceedingly rare and that the duration may be appreciably less than forty days. The daily fluctuation might be so considerable as to constitute almost a secondary reaction in itself, if the extent of.it were all we were considering. When it was known that the government would take over the railroads, at the end of December, 1917, there was an advance in a single day in the railroad average of over six points. There have been true secondary movements which did not carry even so far as this. It is a tried rule, which will help to guide us in studying the secondary movement, that the change in the broad general direction of the market is abrupt, while the resumption of the major movement is apreciably slower. The latter is frequently foretold by a line of accumulation in a bull market or a line of distribution in a bear market.
More Meteors Than Stars
Who is to foresee the sharp break? It seems to depend upon a set of causes altogether different from the adjustment of prices to values, which is the main function and intent of the major swing. It represents a technical market condition more than a summing up and reflection of general knowledge. It means, as the professionals say, that there is too much company on the bull side; or, conversely, that people are selling a bear market short, regardless of the diminishing floating supply of stocks. I have declined in more than one place to advise any man to speculate. That virtuous attitude is easy and cheap, but it will acquire more significance if I do not presume to advise against speculating where a free American citizen feels he has the qualities necessary for success and, more particularly, if he is the kind of man who can stand sucsess. That is the severest of all tests, in other places than Wall Street. There have been many meteors in the financial sky, but few fixed stars.
In the secondary movement of the market the professional has a real and abiding advantage over the amateur. It is an emergency in which his technical experience tells. "Tape reading" is a sort of sixth sense, and the man on the floor can feel a change coming even better than the most accomplished tape reader if he has real aptitude for his work. There are some games in which the amateur is better than the professional. There are many in which he seems at least as good. But in the long run, in nearly all games, the professional will win oftener than the amateur. He will win more when there is anything considerable at stake and he will lose less when losses are inevitable.
Advantage of the Expert
Some authorities on auction bridge estimate that good cards constitute 80 per cent of the advantage in the game. An indifferent or unsound player can win, and even continue to win over an extended period, if he holds good hands, enjoys rather more than average luck and is blessed with good partners. But the remaining 20 per cent makes the vital difference between the incurably mediocre player and the expert.
Playing constantly over a sufficient period of time to average the element of chance, the first-class player must win. He will win, moreover, without any unfair advantage. If, indeed, he depended upon collusive information from his partner, for instance, he would be merely a sharper and never a really first-class player. The advantage of the crook has always been overestimated. His mentality is at some point defective, or he would not be a crook. I have fallen in with a few surprisingly few crooks in Wall Street, in both the professional and the amateur class. They are soon detected, and with their sole advantage eliminated they find their level at the very bottom of the heap. Nemo repente fit ttirpissimus; and, in practice, they amount to little.
Graduating Professionals
Of the many successful speculators who fight for their own hand, like Hal o' the Wynd, those who, not being members of the Stock Exchange or partners in any brokerage house, are therefore obliged to concede the broker's commission and the market turn, all sooner or later become, in every intent, professionals. They devote to the business of speculation exactly the jealously exclusive attention which a successful man gives to any kind of business. The outsider who takes only "an occasional flutter" in the stock market, however shrewd and well informed he may be, will lose money in the secondary swings, where he is pitted against the professional. He cannot recognize the change in movement quickly enough to adapt his attitude; he is usually constitutionally averse to taking a loss where he has previously been right. The professional acts upon the shortest notice, and reactions
or rallies give little notice.
Wall Street Normally Bullish
But the intelligent amateur is on all fours with the professional when a bull market has reacted and become dull. In the old days Wall Street formulated a number of maxims for itself, and one of these was, "Never sell a dull market." It is bad advice in a major bear swing, for the market then will become dull after a sharp rally, and experienced traders will accordingly put out their shorts again. But Wall Street is inherently bullish. One reason for this is that the financial district does not make money in a bear market, contrary to the ideas of people who think that then is the time when the Street reaps its harvest, and wickedly turns disaster ito its own advantage. Wall Street lives on commissions, and not on what it might make by selling short the securities it originates. Large trading and large commissions go together. They are a feature of a bull market, but never one of a bear market. So true is it that Wall Street is normally and healthily bullish, by experience, that I have never known a great trader, with his first reputation established as a bear operator, who did not either turn bull or drop out of the market altogether.
When we studied the major swings we saw that bull markets last longer than bear markets and we might have seen that over a period of years long enough to average both bull and bear swings the tendency seems upward, or at least has heretofore advanced, with the growing wealth of the country. Personally, I do not believe that the war has changed this fundamental fact, at least for the inexhaustible United States, if a special movement of the railroads, to be treated later, for a time at least, modifies the assumption.
James R. Keene
So far as the bear trader is concerned, I am entirely certain that James R. Keene lost as much money as he ever made on the bear side, and that he made all the money he left and spent on his racing stable by his purchases of securities which subsequently appreciated in value. I never enjoyed his intimate acquaintance. It is not unfair, at this distance of time, to say that newspaper men with responsibilities do not cultivate intimacy with large professional speculators. Such intimacy can be misconstrued, however innocent the personal relations may be, and easily results (for Wall Street is reeking with gossip and scandal) in giving the reporter an undesirable reputation for being the interested mouthpiece of that particular operator. This, of course, is a condition which no clean newspaper could or should tolerate.
This is not to say that the newspaper men, or even most of those who had the entree to Keene's highly inaccessible suite at his son-in-law, Talbot J. Taylor's office in Broad Street, were not men of honor. There were good reasons for liking Keene, who was by no means the cold and bloodless bandit some people, with ideas of financiers gathered from the scarehead newspapers or the moving-picture screen, have supposed. He had attractive qualities, and he was a man of his word, even if he was merciless to those who dealt with him and failed to keep theirs. All of us liked his admiring affection for his son Foxall, and his sportsman's love of a fine horse. Little that his enemies ever did to him in the stock market and that was plenty hurt him like the death of his favorite Sysonby, a horse he bred himself and one of the greatest three-year-olds that ever looked through a bridle. Among the newspaper men who could afford to know Keene was Edwin Lefevre, then on the New York Globe. But it is no more than just to say that Lefevre was less a friend than a connoisseur of Keene. He studied him, in a highly amusing way, for use in his cynical but effective Wall Street Stories, in Samson Rock of Wall Street, The Golden Flood and other tales of a like character, now somewhat out of date but interesting reading for those who knew the different Wall Street of twenty years ago.
Addison Cammack
There is another reason why bear operators are credited with more short selling and market "wrecking" than they ever performed or even conceived. Such an operator can bull stocks and keep himself in hes background, while a campaign on the bear side is usually dramatic, with the principal figure very much in the spotlight. Addison Cainmack's era was rather before my time, but people who knew him well say that his bear campaigns were short, sometimes successful and sometimes not, and that he would have been soon ruined or driven into other environment if he had not been an excellent judge of values, and much more interested financially in the growth and prosperity of the country than in efforts to check it. He made his big money buying Northern Pacific, on reconstruction, at $7 a share. He probably had more real belief in the greatness of the United States than some of those critics who are so ready to impugn Wall Street's patriotism. Keene was right, if premature, in his abortive bull campaign in Southern Pacific.
Selling Commodities Short
A 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 Itself
We 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 sccondary breake 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 becoclusive evidence, on all our records, tha 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 movements 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 alt 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 True
We 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 highjptdnt 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 nt>t 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.
How to Call the Turn
It may be conceded at once tha if it is hard to call the turn of a great bear or bull market it is still harder to say when a secondary movement is due although
there are no insuperable difficulties in the way of showing the termination of the secondary movement and the resumption of the main market trend. We cannot Dogmatize abut the depth of such movements, in duration or extent. We have seen, from a study of what was really a secondary reaction in a bull market aggravated by the San Francisco calamity in 1906, that such a reaction can look deceptively like the real thing the development of a new major swing. It can look so vigorous and convincing, as in the case of the Northern Pacific panic of 1901, that even experienced traders will rashly assume that the bull market is over.
Dow estimated the length of a counter movement at from forty to sixty days, but subsequent experience has shown that this longer range is exceedingly rare and that the duration may be appreciably less than forty days. The daily fluctuation might be so considerable as to constitute almost a secondary reaction in itself, if the extent of.it were all we were considering. When it was known that the government would take over the railroads, at the end of December, 1917, there was an advance in a single day in the railroad average of over six points. There have been true secondary movements which did not carry even so far as this. It is a tried rule, which will help to guide us in studying the secondary movement, that the change in the broad general direction of the market is abrupt, while the resumption of the major movement is apreciably slower. The latter is frequently foretold by a line of accumulation in a bull market or a line of distribution in a bear market.
More Meteors Than Stars
Who is to foresee the sharp break? It seems to depend upon a set of causes altogether different from the adjustment of prices to values, which is the main function and intent of the major swing. It represents a technical market condition more than a summing up and reflection of general knowledge. It means, as the professionals say, that there is too much company on the bull side; or, conversely, that people are selling a bear market short, regardless of the diminishing floating supply of stocks. I have declined in more than one place to advise any man to speculate. That virtuous attitude is easy and cheap, but it will acquire more significance if I do not presume to advise against speculating where a free American citizen feels he has the qualities necessary for success and, more particularly, if he is the kind of man who can stand sucsess. That is the severest of all tests, in other places than Wall Street. There have been many meteors in the financial sky, but few fixed stars.
In the secondary movement of the market the professional has a real and abiding advantage over the amateur. It is an emergency in which his technical experience tells. "Tape reading" is a sort of sixth sense, and the man on the floor can feel a change coming even better than the most accomplished tape reader if he has real aptitude for his work. There are some games in which the amateur is better than the professional. There are many in which he seems at least as good. But in the long run, in nearly all games, the professional will win oftener than the amateur. He will win more when there is anything considerable at stake and he will lose less when losses are inevitable.
Advantage of the Expert
Some authorities on auction bridge estimate that good cards constitute 80 per cent of the advantage in the game. An indifferent or unsound player can win, and even continue to win over an extended period, if he holds good hands, enjoys rather more than average luck and is blessed with good partners. But the remaining 20 per cent makes the vital difference between the incurably mediocre player and the expert.
Playing constantly over a sufficient period of time to average the element of chance, the first-class player must win. He will win, moreover, without any unfair advantage. If, indeed, he depended upon collusive information from his partner, for instance, he would be merely a sharper and never a really first-class player. The advantage of the crook has always been overestimated. His mentality is at some point defective, or he would not be a crook. I have fallen in with a few surprisingly few crooks in Wall Street, in both the professional and the amateur class. They are soon detected, and with their sole advantage eliminated they find their level at the very bottom of the heap. Nemo repente fit ttirpissimus; and, in practice, they amount to little.
Graduating Professionals
Of the many successful speculators who fight for their own hand, like Hal o' the Wynd, those who, not being members of the Stock Exchange or partners in any brokerage house, are therefore obliged to concede the broker's commission and the market turn, all sooner or later become, in every intent, professionals. They devote to the business of speculation exactly the jealously exclusive attention which a successful man gives to any kind of business. The outsider who takes only "an occasional flutter" in the stock market, however shrewd and well informed he may be, will lose money in the secondary swings, where he is pitted against the professional. He cannot recognize the change in movement quickly enough to adapt his attitude; he is usually constitutionally averse to taking a loss where he has previously been right. The professional acts upon the shortest notice, and reactions
or rallies give little notice.
Wall Street Normally Bullish
But the intelligent amateur is on all fours with the professional when a bull market has reacted and become dull. In the old days Wall Street formulated a number of maxims for itself, and one of these was, "Never sell a dull market." It is bad advice in a major bear swing, for the market then will become dull after a sharp rally, and experienced traders will accordingly put out their shorts again. But Wall Street is inherently bullish. One reason for this is that the financial district does not make money in a bear market, contrary to the ideas of people who think that then is the time when the Street reaps its harvest, and wickedly turns disaster ito its own advantage. Wall Street lives on commissions, and not on what it might make by selling short the securities it originates. Large trading and large commissions go together. They are a feature of a bull market, but never one of a bear market. So true is it that Wall Street is normally and healthily bullish, by experience, that I have never known a great trader, with his first reputation established as a bear operator, who did not either turn bull or drop out of the market altogether.
When we studied the major swings we saw that bull markets last longer than bear markets and we might have seen that over a period of years long enough to average both bull and bear swings the tendency seems upward, or at least has heretofore advanced, with the growing wealth of the country. Personally, I do not believe that the war has changed this fundamental fact, at least for the inexhaustible United States, if a special movement of the railroads, to be treated later, for a time at least, modifies the assumption.
James R. Keene
So far as the bear trader is concerned, I am entirely certain that James R. Keene lost as much money as he ever made on the bear side, and that he made all the money he left and spent on his racing stable by his purchases of securities which subsequently appreciated in value. I never enjoyed his intimate acquaintance. It is not unfair, at this distance of time, to say that newspaper men with responsibilities do not cultivate intimacy with large professional speculators. Such intimacy can be misconstrued, however innocent the personal relations may be, and easily results (for Wall Street is reeking with gossip and scandal) in giving the reporter an undesirable reputation for being the interested mouthpiece of that particular operator. This, of course, is a condition which no clean newspaper could or should tolerate.
This is not to say that the newspaper men, or even most of those who had the entree to Keene's highly inaccessible suite at his son-in-law, Talbot J. Taylor's office in Broad Street, were not men of honor. There were good reasons for liking Keene, who was by no means the cold and bloodless bandit some people, with ideas of financiers gathered from the scarehead newspapers or the moving-picture screen, have supposed. He had attractive qualities, and he was a man of his word, even if he was merciless to those who dealt with him and failed to keep theirs. All of us liked his admiring affection for his son Foxall, and his sportsman's love of a fine horse. Little that his enemies ever did to him in the stock market and that was plenty hurt him like the death of his favorite Sysonby, a horse he bred himself and one of the greatest three-year-olds that ever looked through a bridle. Among the newspaper men who could afford to know Keene was Edwin Lefevre, then on the New York Globe. But it is no more than just to say that Lefevre was less a friend than a connoisseur of Keene. He studied him, in a highly amusing way, for use in his cynical but effective Wall Street Stories, in Samson Rock of Wall Street, The Golden Flood and other tales of a like character, now somewhat out of date but interesting reading for those who knew the different Wall Street of twenty years ago.
Addison Cammack
There is another reason why bear operators are credited with more short selling and market "wrecking" than they ever performed or even conceived. Such an operator can bull stocks and keep himself in hes background, while a campaign on the bear side is usually dramatic, with the principal figure very much in the spotlight. Addison Cainmack's era was rather before my time, but people who knew him well say that his bear campaigns were short, sometimes successful and sometimes not, and that he would have been soon ruined or driven into other environment if he had not been an excellent judge of values, and much more interested financially in the growth and prosperity of the country than in efforts to check it. He made his big money buying Northern Pacific, on reconstruction, at $7 a share. He probably had more real belief in the greatness of the United States than some of those critics who are so ready to impugn Wall Street's patriotism. Keene was right, if premature, in his abortive bull campaign in Southern Pacific.
Selling Commodities Short
A 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 Itself
We 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 sccondary breake 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 becoclusive evidence, on all our records, tha 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 movements 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 alt 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 True
We 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 highjptdnt 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 nt>t 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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