Category Archives: William Peter Hamilton

Dow’s Theory on Government and Markets

Posted on September 13, 2020 by nlo-admin | Leave a comment

“Remember that the industrial and railroad stocks used in the averages are essentially speculative. Only to a limited extent are they held for fixed income by people to whom safety of the principal should be the main consideration, and their holders are constantly changing. If they were not speculative they would be useless for a stock market barometer. The reason why railroad stocks during 1919 did not share the bull market in the industrials was that, through government ownership and government guaranty, they had in a real sense ceased, for the time at least, to be speculative. They could not advance in any market, bull or bear, more than enough to discount the estimated value of that guaranty.”

-William Peter Hamilton, 4th Editor of the Wall Street Journal (The Stock Market Barometer. Harper. 1922. page 186.)

Government’s Impact on Risk

According to Hamilton:

“It is plain, then, that with a government guaranty of a minimum return, based upon the average earnings of three years ended June 30, 1917, the railroads entered the fixed income class (page 189.).”

-William Peter Hamilton, 4th Editor of the Wall Street Journal (The Stock Market Barometer. Harper. 1922. page 189.)

Many are arguing that the government purchase of assets along the widest spectrum of risk is the cause of a more speculative investing environment. The work of Hamilton, with the citation of rail stocks after nationalization, point to the opposite outcome, suggests that if the government is so influential then markets should become more sedated rather than increasingly restive.

Fannie Mae: The Evidence

The proof of the strength in the claims made by William Peter Hamilton can be found in the share price of the Fannie Mae and the 30-Year Treasury from 1977 to 2020.

As soon as Fannie Mae lost the implicit guarantee and achieved the actual guarantee of government support the share price has gravitated to tracking the 30-Year Treasury. The chart below shows Fannie Mae from 2013 to 2020 being unable to track beyond the 30-Year Treasury.

For now, Fannie Mae has become a bond even though it is possible to vacillate between $0.50 to $6.00 (+11,000% or -91.67%).

William Peter Hamilton

Often cited by Dow Theorists Robert Rhea and Richard Russell, Hamilton was an intense follower of the writings of Charles H. Dow, co-founder of the Wall Street Journal.

The Dow and Recessions

Posted on December 28, 2018 by nlo-admin | Leave a comment

The following is raw data on the performance of the Dow Jones Industrial Average (DJIA) versus the National Bureau of Economic Research (NBER) call of a recession from the peak to trough from 1900 to 2018.

Our aim is the determine if there is any coincidence or correlation between the two. We’d also like to emphasize that it would be especially ideal if there is confirmation of the idea that the stock market is a leading indicator for the economy.

Simple Coincidence

Below is the simple coincidence of the DJIA and NBER. This takes the date when the NBER calls a recession or an expansion and registers the level of the DJIA for the first trading day of month that an NBER call takes place and registers the level of the DJIA when the next NBER call begins.

The times when an recession was called but the DJIA was instead higher is indicated in red. As an example, On August 1, 1918, the NBER indicated that there was a recession until March 1, 1919. In that same period, the Dow increased from 80.71 to 85.58.

There was no instances of an expansion period being called by the NBER that was followed by a lower level in DJIA.

Date	NBER	DJIA
December 1, 1900	expansion	66.43
September 1, 1902	recession	66.55
August 1, 1904	expansion	52.73
May 1, 1907	recession	83.87
June 1, 1908	expansion	74.38
January 1, 1910	recession	98.34
January 1, 1912	expansion	82.36
January 1, 1913	recession	88.42
December 1, 1914	expansion	56.76
August 1, 1918	recession	80.71
March 1, 1919	expansion	85.58
January 1, 1920	recession	108.76
July 1, 1921	expansion	91.26
May 1, 1923	recession	97.40
July 1, 1924	expansion	96.45
October 1, 1926	recession	159.69
November 1, 1927	expansion	181.65
August 1, 1929	recession	350.56
March 1, 1933	expansion	52.54
May 1, 1937	recession	174.59
June 1, 1938	expansion	110.61
February 1, 1945	recession	153.79
October 1, 1945	expansion	183.37
November 1, 1948	recession	189.76
October 1, 1949	expansion	182.67
July 1, 1953	recession	269.39
May 1, 1954	expansion	319.35
August 1, 1957	recession	506.21
April 1, 1958	expansion	445.47
April 1, 1960	recession	615.98
February 1, 1961	expansion	649.39
December 1, 1969	recession	805.04
November 1, 1970	expansion	758.01
November 1, 1973	recession	948.83
March 1, 1975	expansion	753.13
January 1, 1980	recession	824.57
July 1, 1980	expansion	872.27
July 1, 1981	recession	967.66
November 1, 1982	expansion	1,005.70
July 1, 1990	recession	2,899.26
March 1, 1991	expansion	2,909.90
March 1, 2001	recession	10,450.14
November 1, 2001	expansion	9,263.90
December 1, 2007	recession	13,314.57
June 1, 2009	expansion	8,721.44
December 1, 2018	recession	25,826.43

There were 8 instances (17%) where there was no coincidence with the call of a recession or expansion and a commensurate decline or increase in the DJIA.

The above coincidence data is graphically represented below. The areas in red includes the the divergence of the NBER call for a recession and the DJIA along with the period that immediately followed. This is basically showing that any recession indication that is followed by an increased in the DJIA, and the subsequent expansion calls, are not considered to be coincidence until after the last expansion and the next coincidence of a recession call.

Naturally, this puts the coincidence level at 65% instead of the previous 83%. This is a literal take on whether there is a coincidence between the direction of the DJIA and when the NBER actually calls a recession or an expansion. It could be said that the DJIA follows the directions of the NBER except that the call made for the economy usually takes place at least a year after the fact.

Recession Length and Coincidence

Another method for measuring the coincidence of the DJIA and the official NBER definition of a recession is to rank the recession by length. In this case, we take the beginning of a recession and end of a recession and use the first trading day of that month and measure to the first trading day of the month when the recession is considered to have ended. Below is the ranking of the length recessions from shortest to the longest compared to the DJIA.

NBER peak	NBER trough	previous expansion (months)	DJIA
January 1, 1920	July 1, 1921	10	-37.16%
January 1, 1913	December 1, 1914	12	-35.81%
July 1, 1981	November 1, 1982	12	3.93%
January 1, 1910	January 1, 1912	19	-16.25%
September 1, 1902	August 1, 1904	21	-20.77%
August 1, 1929	March 1, 1933	21	-85.01%
May 1, 1923	July 1, 1924	22	-0.98%
April 1, 1960	February 1, 1961	24	5.42%
October 1, 1926	November 1, 1927	27	13.75%
May 1, 1907	June 1, 1908	33	-11.32%
November 1, 1973	March 1, 1975	36	-20.63%
November 1, 1948	October 1, 1949	37	-2.97%
August 1, 1957	April 1, 1958	39	-12.00%
August 1, 1918	March 1, 1919	44	6.03%
July 1, 1953	May 1, 1954	45	18.55%
May 1, 1937	June 1, 1938	50	-36.65%
January 1, 1980	July 1, 1980	58	5.78%
December 1, 2007	June 1, 2009	73	-34.50%
February 1, 1945	October 1, 1945	80	19.15%
July 1, 1990	March 1, 1991	92	0.37%
December 1, 1969	November 1, 1970	106	-5.84%
March 1, 2001	November 1, 2001	120	-11.35%

In this perspective on the coincidence between recessions and the performance of the DJIA, we can plainly see that there is a 63% coincidence. Overall, not a bad amount of coincidence. However, we think that we can generate an outcome that is closer to 100% coincidence if we twist the data to fit our agenda.

There is a saying that “the stock market is a leading indicator for the economy.” We promise we didn’t make this up. Furthermore, we have quoted the venerable Richard Russell of Dow Theory Letters fame to prove our point.

"The stock market is an indicator for the economy, a leading indicator (Russell, Richard. Dow Theory Letters. October 4, 1967. page 2.).”

"Just as [Elliot] Janeway senses new leading indicator of the business-market condition, I too, often sense an index which I feel should be accorded great authority. Right now I would say it is world stock exchange averages (see last Letter). The leading stock markets of the world are now heading down in earnest (statistics in Barron's each week), and this has an ominous ring to it (Russell, Richard. Dow Theory Letters. August 29, 1973. page 6.)."

"...if you believe that the market is its own best leading indicator then you have to believe what this market is saying (Russell, Richard. Dow Theory Letters. September 19, 1984. page 2.)."

"I continue to remind my subscribers that the crucial issue here is NOT whether the CPI turns up or down next month, it’s NOT whether the leading indicators blip up or down in July. No, the critical issue here is the direction of the primary trend of the stock market (Russell, Richard. Dow Theory Letters. June 8, 1994. page 2.)."

For nearly 6 decades, Richard Russell impressed upon his readers that the market leads the way when it came to understanding the direction of the economy. Naturally, William Peter Hamilton, fourth editor of the Wall Street Journal, had the following to say about the insights of the stock market:

“The market is not saying what the condition of business is to-day. It is saying what that condition will be months ahead (Hamilton, William Peter. The Stock Market Barometer. Harper & Brothers. 1922. page 42.).”

Not to be outdone, Charles H. Dow, co-founder of the Wall Street Journal, has the following to say about the stock market as a leading indicator:

“The stock market discounts tendencies. Stocks went up before the improvement in business became pronounced. Stocks will discount depression before depression actually exists, but this discounting quality in stocks make them run to extremes. They discount shadows as well as substances and often anticipate that which does not occur (Dow, Charles H. Review and Outlook. Wall Street Journal. May 10, 1900.).”

We have spanned over 100 years of claims that the stock market is a leading indicator for the economy. If this is true then we can then surmise that any of the years where the NBER called for a recession, the stock market had already embarked on a meaningful decline and if the data somehow shows a gain in stocks from a peak to trough period then it is because the decline and subsequent recovery was already in place.

Let’s see if the years when the DJIA registered a gain in the period from peak to trough of a recession was already preceded by a decline in the Dow Jones Industrial Average.

Evidence of Market Coincidence preceding Economic Reality

NBER peak	NBER trough	DJIA date	DJIA peak	DJIA date	DJIA trough	% change
July 1, 1981	November 1, 1982	4/27/1981	1,024.05	8/12/1982	776.92	-24.13%
April 1, 1960	February 1, 1961	1/5/1960	685.47	10/26/1960	566.05	-17.42%
October 1, 1926	November 1, 1927	2/11/1926	162.31	3/30/1926	135.20	-16.70%
August 1, 1918	March 1, 1919	6/8/1917	98.58	12/19/1917	65.95	-33.10%
July 1, 1953	May 1, 1954	1/5/1953	293.79	9/14/1953	255.49	-13.04%
January 1, 1980	July 1, 1980	2/13/1980	903.84	4/21/1980	759.13	-16.01%
February 1, 1945	October 1, 1945	3/7/1945	161.52	3/26/1945	152.27	-5.73%
July 1, 1990	March 1, 1991	7/19/1990	2,993.81	10/11/1990	2,387.87	-20.24%

Of the eight periods when there was a positive change in the DJIA within the defined NBER recession, five of them had already experienced a decline and recovery which explains why there was a positive result in our initial review.

The remaining three periods declined after the NBER recession had already started. However, each of the three DJIA troughs occurred before the end of the NBER trough. In this respect, even in failure, the stock market managed to fulfill half of the market bromide. This means that 93% of the dates provided by the NBER since 1900 for both recessions and expansions were led by stock market changes in conformity with the later call in the economy.

Conclusion

In our simple coincidence evaluation, we found that only 17% of the periods did not conform to the idea that stock markets coincide with recessions and expansions. Somehow, all available data suggests that expansions in the economy are perfectly aligned with stock market increases.

When ranked by the length of the recessions, there is a clear majority of recessions that align with declines in the DJIA. However, the minority of recessions that show DJIA gains is somewhat confounding.

However, when we recognize that the stock market is a leading indicator for the economy, we find that the remaining 17% that don’t conform to the theory that the stock market is a leading indicator for the economy shrinks to 6.52% when accounting for the fact that market gains during a recession result from the market having recovered in advance of the recession low.

Dow Theory Q&A

Posted on April 8, 2013 by nlo-admin | Comments Off

Reader BlueIce comments (found here):

“So for the past four years, the NYSE is up but volume down…What is the root cause, if any? Bank Bernankski ?”

Our Response:

While there is considerable belief that the Federal Reserve has been the main driver in the financial markets since the March 2009 low, we believe that the Fed’s activity has NOT YET been felt in the stock market. First we’ll explain the two primary reasons we believe this. Afterwards, we’ll explain what we believe are the possible outcomes to the Fed’s current policies.

First, in our January 19, 2011 article titled “Federal Reserve Isn’t to Blame for the Current Market Run” (found here), we concluded with the following thought:

“A cursory review of market data during the periods from 1860 to 1914 makes it clear that declines of nearly -50% or more are likely to retrace +66% to +100% of prior declines. This pattern has been easily demonstrated in the periods after 1914. However, we’re only trying to illustrate that the acceptance of the Federal Reserve’s role as the leading cause of the current +69% retracement of the prior decline (2007-2009) is false.”

We’ve maintained the view that the Federal Reserve’s impact on the stock market has been muted so far.

Second, regarding the issue of manipulation of the markets, which is implicit in the discussion of the Federal Reserve’s involvement in the rise of the stock market, we take the Dow Theory view on the topic. Charles H. Dow was very specific about market manipulators and manipulation. Dow has said that manipulation is a factor of the market in the day-to-day movement. However, the long-term trend of the market cannot be manipulated as demonstrated in detail from the writings of William Peter Hamilton, former editor of the Wall Street Journal.

Hamilton says of manipulation:

“The market is always under more or less manipulation.”

“Even with manipulation, embracing not one but several leading stocks, the market is saying the same thing, and is bigger than the manipulation”

“Major Movements Are Unmanipulated-One of the greatest of misconceptions, that which has militated most against the usefulness of the stock market barometer, is the belief that manipulation can falsify stock market movements otherwise authoritative and instructive”

“These discussions [of manipulation] have been made in vain if they have failed to show that all the primary bull markets and every primary bear market have been vindicated, in the course of their development and before their close, by the facts of general business, however much over speculation or over-liquidation may have tended to excess, as they always do, in the last stage of the primary swing”

“It has been shown that, for all practical purposes, manipulation has, and can have, no real effect in the main or primary movement of the stock market, as reflected in the averages. In a primary bull or bear market the actuating forces are above and beyond manipulation. But in the other movements of Dow’s theory, a secondary reaction in a bull market or the corresponding secondary rally in a bear market, or in the third movement (the daily fluctuation) which goes on all the time, there is room for manipulation, but only in individual stocks, or in small groups, with a well-recognized leading issue”

(Source: Hamilton, William Peter, The Stock Market Barometer, Wiley & Sons, New York, 1922.)

The Fed and world central bank manipulation has an impact on the day-to-day and maybe the medium-term, however, the long term will exert itself regardless of the manipulation.

Finally, while we are skeptical about the Dow Theory secular bull market indication, we have to accept that it is real. As with most economic policy, the impact is felt long after the implementation. Dow Theory might be saying that we’re about to enter a phase hyper-activity in the stock market. If this is the case, then we just might see the impact of the Federal Reserve’s stimulus of the last several years finally kick in, catapulting the stock market to unbelievable heights.

The lack of trading volume in the stock market since 2009 reflects little or no participation on the part of the public. If this is true, then any meaningful rise in trading volume (on the buying side) due to added participation from the public could result in tremendous gains. This thought sits in the back of our mind as we strategize the best way to take advantage while not being over exposed.

When we say that the public hasn’t participated in the stock market’s rise, who cares? The answer is the very financial institutions that required bailouts in 2008. They have been trading amongst each other in a game of hot potato. If the public doesn’t jump in soon there could be major fireworks to the downside.

Again, if the Dow Theory bull market indication isn’t real then we’ll see another round of “too big to fail” institutions coming with hat in hand to the U.S. government. The most vulnerable institutions could be those that were forced to merge with companies like Bank of America/Merrill, Wells Fargo/Wachovia and JPMorgan/Bear Stearns. From our research on this topic, we’ve seen what happens when a sizable failed institution is forcibly merged with an ailing but salvageable company (i.e. our article on CreditAnstalt).

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Posted in Dow Theory, manipulation, Q and A, William Peter Hamilton

Dow Theory: The Beginning of a Cyclical and Secular Bull Market?

Posted on March 13, 2013 by nlo-admin | 1 comment

The world of Dow Theory was abuzz after the Dow Jones Industrial Average and the Dow Jones Transportation Average charged to all-time highs on March 5, 2013 (found here). At the time, the Dow Jones Industrial Average had finally capitulated to the inexorable forces that had long since propelled the Dow Jones Transportation Average above the 2011 all-time high. The confirmation of a Dow Theory bull market came when the Dow Jones Industrial Average finally exceeded the all-time high of 14,164 set in October 2007.

The action of the Dow Industrials and Transports has been so compelling that Dow Theorist Richard Russell acquiesced to the strength of the market on March 11, 2013 by saying the following:

“Yes, I know that this market is uncorrected during its long rise from the 2009 low, and I know that there are risks in buying an uncorrected advance that is becoming uncomfortably long in the tooth, but my suggestion is that my subscribers should take a chance (after all, Columbus took a chance) and take a position in the DIAs.”

In the same posting, Russell later punctuates the point by saying:

“I really believe that subscribers should take a flyer on this market. After all, after weeks of flirting with a new high in the Industrial Average, the Dow finally confirmed the previous record high of the Transportation Average. With the Industrials and the Transports both in record high territory, I think being in the market is justified under Dow Theory.”

By all indications, this Dow Theory bull market indication is the real deal, especially when it is endorsed by Russell’s 55 years of experience on the topic. The implications of this signal are significant for one very important reason, this time we’ve achieved a secular bull market indication (learn about cyclical and secular trends).

Throughout stock market history, cyclical primary bull markets tend to last 2-4 years. These bull markets require rapt attention to the nuances and vagaries of changes in the trend. The last indication of a cyclical primary bull market was on July 23, 2009, when the Dow Industrials traded at 9,069.29. Based on our interpretation of Dow Theory, we received a cyclical primary bear market indication on August 2, 2011 when the Dow Jones Industrial Average was at 11,866.62.

Secular bull markets, on the other hand, require very little attention and have typically lasted between 15 and 18 years. Secular bull markets are the proverbial sweet spot of investing with the trend, where “buy-and-hold” is the rule. The two most prominent secular bull markets resulted in the Dow Jones Industrial Average increasing by 10-fold or more. From 1942 to 1966, the Dow rose from 100 to 1000 and in the period from 1982 to 2000, the Dow went from 1,000 to 11,722. If the current implications are correct, we could be on the cusp of a run to Dow 100,000.

Volume: The Lone Holdout

The three major components of Dow Theory are the Industrials, Transports and trading volume. As described above, the Industrials and Transports have achieved the required all-time highs at (or near) the same time which would indicated that we are in a new cyclical AND secular bull market. However, volume has been the holdout in the current move higher.

In the seminal book on Dow Theory titled The Stock Market Barometer, written by William Peter Hamilton, it says the following about trading volume, “It is worth while to note here that the volume of trading is always larger in a bull market than in a bear market. It expands as prices go up and contracts as they decline.”

The average trading volume for the Industrials and Transports has been in a declining trend (contracting) since the 2009 low, as seen in the charts below.

In order for Dow Theory to have relevance, increasing volume needs to accompany the rise of the stock market to ensure that there is sufficient participation and interest. Unfortunately, average trading volume, as indicated in the above charts for the respective indexes, has been trending lower since 2009. This suggests that we could only be in an extended cyclical bull market, within a secular bear market, rather than at the beginning of a cyclical and secular bull market. The key to understanding trading volume and its interpretation are found in the table below.

volume	price	interpretation
decrease	decrease	positive
decrease	increase	negative
increase	decrease	negative
increase	increase	positive

In the days before volume was tabulated for the individual Dow indexes, the New York Stock Exchange trading volume was the proxy for the market trend in conjunction with the Industrials and Transports. Below is the 200-day average trading volume of the NYSE since 2001.

What is evident is the dramatic rise and peak of average trading volume during the decline of the stock market from the peak in 2007 to the bottom in 2009. However, once the market started taking off, the trading volume uncharacteristically plunged. To emphasis the point, below we have included the charts for the cyclical bull markets from 2001-2007 and 2009 to the present.

In the chart from 2001, we can see that NYSE average trading volume hit a peak in 2002 and then flat-lined for a couple of years until 2005. However, as the strength in the stock market grew, the trading volume accelerated to new highs. This was the hallmark of a true bull market run, rising prices and rising volume.

In the chart from 2008, the average trading volume for the NYSE has had a declining trend throughout the whole bull market run from 2009 to the present. As indicated in the table above, declining volume with increasing prices should be interpreted as a negative. After volume has been in a declining trend for so long, the only alternative is for a dramatic increase.

When the increase in volume arrives, the question then becomes, will there be a dramatic increase or decrease in stock market price? Will the general public’s lack of participation be the catalyst that charges the market to move higher? This situation has to be resolved at some point.

To round out our thoughts on the potential secular bull market signal that we recently received, we thought we would compare it to the last secular bull market change in trend. In the period from 1966 to 1982, the Dow Industrials never traded significantly above 1,000. However, that all ended in late 1982 when the stock market broke above 1,000 and never looked back.

Below is a chart of the Industrials, Transports and NYSE trading volume from March 1982 to November 1982:

The most important information to be gleaned from this chart is the fact that all three of the essential indicators for Dow Theory were confirming each other at a critical point in time. They all achieved clear bull market indications by rising in unison. The current divergence between the Dow indexes with the NYSE trading volume suggests that we will be witness to the greatest transition in the history of the stock market.

The above examination of trading volume, based on a what we believe to be reliable sources, has us concerned that a new secular bull market is not really what we’re witness to.

As William Peter Hamilton has said in The Stock Market Barometer:

“The professional speculator is no more superfluous than the pressure gauge of the steam-heating plant in your cellar. Wall Street is the great financial power house of the country, and it is indispensably necessary to know when the steam pressure is becoming more than the boilers can stand.”

The pressure in the market is building and we may be watching the beginning of the most spectacular stock market blow-off ever. Just before an even more astonishing decline.

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Posted in Charles Dow, Charles H. Dow, Dow Theory, Dow Theory Non confirmation, Richard Russell, volume, William Peter Hamilton