PART 2 presented some of the insights about the Stock Market that Charles Henry Dow gave to his readers.
Readers, Traders, Investors, lend me your eyes; I write to resurrect Charles Henry Dow, and to bury those who have taken
the name of Charles Henry Dow in vain!
Welcome to 3rd Part of THE "DOW THEORY" CON! Series.
This Part discusses the rise of the "Dow Theory Cult" and the devastating rebuttals that the professionals issued to "the
Dow Theorists" in "those days". Yes, 1910 through 1936 was a long time ago, and many of these "DOW THEORISTS" were hoping
that no one checked!
Yes, It’s true. The Dow Theory was repudiated by professional traders prior to 1922.
Let’s walk together down Wall Street’s memory lane, and see what has been overlooked, or deliberately hidden,
to prevent you from finding the real goodies in the Treasure Trove we call the Stock Market.
The most damning piece of evidence that the "Dow Theorists" have hidden from you comes from the "premier" source for the
history of Charles Henry Dow, and the Dow Jones & Company,
What did John Prestbo reveal about the DOW THEORY?
"In 1921, a reader wrote to the Journal to complain that he had followed the Dow Theory but hadn’t made any money.
An editorial, presumably written by Hamilton, replied that the Dow Theory was a barometer of market, not a guide to gambling
in it. However, the Journal thereafter avoided using the term "Dow Theory" except to repeat the barometer metaphor. Disciples
from outside Dow Jones & Co. picked up the Dow Theory banner and carried it forward to the present day, notably Robert
Rhea and Richard Russell."
When did John Prestbo reveal this fact?
He brought this fact to the public’s attention in November of 1999.
How did John Prestbo reveal this fact?
Perhaps the "DOW THEORISTS" failed to notice this revelation as it was stated in an obscure article, or a passing remark
in an poorly covered speech or interview!
Wrong!
John Prestbo revealed this devastating fact (devastating to the Dow Theorists) in his book Markets Measure: An Illustrated
History of America Told Through the Dow Jones Industrial Average (Hardcover) by John A. Prestbo (Editor),Dow
Jones & Company, Inc. (November 1999).
You, our trusty readers, will have to judge the culpability of the DOW THEORISTS, as you are the ones who were keep out
the current Bull Market for over three years by some of the more prominent DOW THEORISTS!
After all, those of you who were deceived have borne the financial brunt (lost profits) by failing to invest at the right
time!
The evidence by John Prestbo of the Dow Jones & Company does imply that that many of these DOW THEORISTS knew their
theory didn’t work. It seems unlikely that the "experts" on the Dow Jones Averages would have failed to notice this
book!
We now submit the second piece of evidence about the "DOW THEORY" CON!
Alfred Cowles did a famous study in 1932. This Landmark study asked the question "Can Stock Markets forecasters
forecast?".
Alfred Cowles’s test of the most popular Stock Market forecasters revealed the following:
"1. The records of 11 leading financial periodicals and services since 1927, over periods varying from 10 to 15.5 years,
fail to disclose evidence of ability to predict successfully the future course of the stock market.
2. Of the 6904 forecasts recorded during the 15.5 year period, more than four times as many were bullish as bearish, although
more than half of the period was occupied by bear markets, and stocks, at the end were at only about two-thirds of their level
at the beginning.
3. The record of the forecasting agency with the best results for the 15,5 years since 1927, when tabulated back to 1903,
for the 40 years showed results 3.3 per cent a year better than would have been secured by a continuous investment in the
stocks composing the Dow-Jones industrial average. Under present laws the capital-gains tax might wipe out most of this advantage.
While prospects for the speculator are, therefore, not particularly alluring, statistical tests disclose positive evidence
of structure in stocks prices which indicates a likelihood that whatever success may be claimed for the very consistent 40-year
record is not entirely accidental. A simple application of the ‘inertia’ principle, such as buying at turning
points in the market after prices for a month averaged higher, and selling after they averaged lower, than for the previous
month, would have resulted in substantial gains for the period under consideration. "
We know that the "DOW THEORY" was the dominant technique at this time! It’s reasonable to assume that the Alfred
Cowles study was a valid test of the "DOW THEORY", regardless of differences in interpretation by the competing "DOW THEORISTS".
A well publicized study from the Journal of Finance, Vol. L111, No. 4, August 1998 attempted to restore William
Peter Hamilton’s reputation!
The article, "
THE DOW THEORY: WILLIAM PETER HAMILTON’S TRACK RECORD RECONSIDERED" failed to accomplish it’s mission!
When one removes the statistical gibberish, one is left at the beginning (the real problem), which this study acknowledged.
WHAT IS THE REAL PROBLEM WITH THE "DOW THEORY"?
I quote the Journal of Finance article "THE DOW THEORY"
Analysis of the Hamilton’s Editorials!
"To evaluate Hamilton as a market timer, we code the 255 Hamilton editorials as bullish, bearish, neutral, or indeterminate!
We then collect total return information on the US Stock Market over that period, and perform parametric and nonparametric
tests of trading strategies analogous to those evaluated by Cowles. Finally, we examine the price dynamics of the Dow Industrials
around editorial publication dates."
Hamilton’s Editorials
"Unfortunately, the recommendations in Hamilton’s editorials are not always clear! Cowles solution was to have five
subjects score the editorials, and then take the majority opinion on each. We use only one subject to score the editorials.
"
One must ask how many subjects were used in this research study to find the one subject who answered the semantical
Rorschach testproperly( provides the right answers to prove the mandatory (prepaid) conclusion). Grant providers demand results for
their money!
Wouldn’t it be interesting to know who paid for this study!
Hamilton's writings capture his healthy ego. He made no secret that he thought Charles Dow to be far too
cautious in his editorials. Hamilton wrote of Dow that;
"He {Dow} would write a strong, readable and convincing editorial, on a public question affecting finance and business,
and in the last paragraph would add safeguards and saving clauses which not merely took the sting out of It but took the "wallop"
out of it. In the language of the prize ring, he pulled his punches."
This is too funny when you realize that analysts have problems determining just what Hamilton did say in his forecasts!
Perhaps the statement "the walking and the talking don’t line up" was first created to describe William Peter Hamilton!
We now submit the final piece of evidence proving that the "DOW THEORY " is a con!
We now place into evidence the exact words from a man known for his intense record keeping, scholarship, and knowledge
of markets.
THE DOW THEORY OBSOLETE! by WILLIAM DELBERT GANN
During recent years, the Dow Theory has spread all over the country. People have begun to regard it as very valuable and
infallible, but, in fact, it is now of practically of no value to a trader. With so many stocks listed on the New York Exchange,
30 stocks, or 20 stocks are no longer a representative of the trend. Besides, you cannot trade in the Averages (this statement
was true until recently). You must follow the trend of individual stocks in order to make money.
The DOW THEORY worked quite well up until 1916, when the WORLD WAR changed everything! Then this country changed from an
agricultural country to a manufacturing country. In 1916, when the Dow Jones 30 Industrials advanced to new highs, which was
7 points above the highs of 1906, the Railroad Averages at that time were 24 points under the 1906 record high. The man who
waited for the Rails to confirm the upward trend in Industrials certainly got left behind, missed opportunities, and probably
lost money!
In 1917, the Government took over the Railroads, and in December, 1917, the Dow Jones 20 railroad Averages declined to
69. The Industrials at the same time made a low of 66. This was the first time that the Rails were as low as they were in
1897, while the Industrials were 13 points above the 1907 panic lows.
In 1918 and 1919, the Rails failed to follow the Industrials, and were no good as a guide, or confirmation, according to
the DOW THEORY. In July, 1919, the Industrials were making a new record high while the Rails were making new low levels. In
November, 1919, the Industrial reached a new high of 119 1/2. In the same month, the Railroad Averages reached the low of
the year, only 3 points above their 1907 lows. The Rails were going exactly opposite to the trend of the Industrials, and
the DOW THEORY was not working!
In June of 1921, the Railroad Averages reached a low of 64. In August of 1921, the Industrial Averages reached the same
low of 64. The Industrial Averages were only 2 points under the 1907 lows. Then followed the big bull market in Industrial
Stocks, and the Rails were laggards.
In January, 1925, the Industrial Averages crossed 120, the record high of 1919, and the Rails were still 38 points below
their 1906 highs, and 12 points below their 1916 highs. If you had waited for the Rails to confirm the Industrial Averages
by making new highs before buying Industrial stocks, you would have missed big opportunities, and would have had to wait until
July, 1927, when the Rails crossed the highs made in 1906. The Industrial Averages at that time were 63 points above the 1909
highs, and 80 points above the 1906 highs for Industrial stocks.
On September 3, 1929, the 30 Industrial Averages reached the highest point in history at 386, and the Rails reached a high
of 189. After the panicky decline to November, 1929, the Industrial Averages rallied nearly 100 points. The Rails rallied
only 29 points. After April, 1930, the Rails were weaker than the Industrials, and had smaller rallies.
In 1931, the Rails broke 42, the low made in 1896. In June 1932, the Rails declined to 13 1/8, while the 30 Industrial
Averages declined to 40 ½. The Industrials were 12 points below the 1896 lows, while the Rails were 29 points under their
1896 lows.
In July 1933, the Industrials rallied to 110, and the Rails rallied to 58.
In October, 1933, the Industrial Averages reacted to 85 ½, and the Rails to 33. The Industrials never broke the March 1933
lows until they had advanced to 149 ½ in November, 1935.
In March, 1935, the Rails sold at 27 while the Industrials were at 96. The Industrials were 13 points above the lows of
October, 1933, while the Rails were 6 points below. This again proved that you could not depend upon the DOW THEORY.
From March, 1935, to November, 1935, the Industrials advanced 53 ½ points while the Rails rallied only 12 points. You would
have missed profits of anywhere from 50 to 75 points if you had waited to buy Industrial stocks until the Rails made new highs,
and confirmed the advance.
This is plenty of proof that the DOW THEORY is now obsolete, and that you cannot depend upon it to work in the future.
W. D. Gann January 3, 1936.
Any questions, readers?
An important thing to remember when you read the Gann commentary shown above is the numerical value of the Averages. W.
D. Gann is talking about real averages,not the Index numbers you now use in the Dow Averages.
For example, the Index number currently used for the Dow Jones Industrials is 11,347.45 as of the close on 4/21/2006. The
real average is 113.40.The real all time high for the Dow Jome Industrials is 386. Just in case you were wondering where all
the prosperity went!
Well, dear readers, we now close this part of the "DOW THEORY" CON! SERIES.
The next part (PART 4) will present some of the "Great Traders" who did understand what Charles Henry Dow was talking about,
and went on to even greater breakthroughs.
We will also provide "hidden facts" that cause many of you to change your investment strategies in a "major" way.
"WHEN TIME AND PRICE COINCIDE, CHANGE IS IMMINENT".
W.D. GANN
The basic tool for the manipulation of reality is the manipulation of words. If you can control the meaning of words, you
can control the people who must use the words.
Philip K. Dick
