THE CYCLE OF TRADE 1. Market movements.—If the investment market were of such a character that each type of security might be brought to a stable price by the force of supply and demand the task of the investor would be very much simplified. The market for securities is, however, in a continuous state of complicated change. It is always responding to new conditions, and in so doing it is always over-running the correc tion and falling into opposite errors from which arise new disturbances. Among the changes there may be distinguished minor fluctuations, accidental disturb ances, the ebb and flow of regular seasonal change, the movements which constitute the process known as the cycle of trade and certain other slow, long-continued changes which reach from decade to decade.
Mr. Charles H. Dow, one of the founders of the Wall Street Journal, and a man of rare insight, form ulated with reference to these changes what is known as Dow's law. He likened the course of the stock market to a river. His conception has thus been de scribed.
The course of prices over a long period of time resembles the course of a winding river which doubles on itself again and again, so that in traveling from one point to another, distant perhaps twenty miles in a straight line, it will ac tually traverse a distance of fifty or sixty miles in making those twenty, and will often travel for some miles in a di rection opposite to that of its ultimate or true course. Fur thermore, the course is full of eddies which keep the straws on its surface twisting and turning back and forth all the time.
The ultimate or true course of the river is called the primary movement of prices and he said it expressed the gradual adjustment of prices to investment values result ing from the operations of investors—viz., those who bought stocks for income rather than for speculation. By value he meant the relation of the earning capacity and dividend yield of a company's stock to the general value of money so measured by interest rates. The secondary movements or swings he called the river's doublings and twistings, and he attributed these mainly to the operations of margin spec ulators. The surface eddies were the daily fluctuations which reflected mainly the activities of the floor traders who operate in the Exchange. Sometimes the surface eddy dou
bled on the actual flow of the current, and sometimes the actual flow of the current doubled on the river's true course. Traders' operations were always intimately correlated to and interwoven with those of the margin speculators and those of the margin speculators with those of the investor, the whole forming the continuous current of the river.
2. Minor fluctuations.—Minor fluctuations result largely from the varying contests of bulls and bears. The market is constantly passing from a condition of being over-bought to one of being over-sold. Such conditions result not only from the contagion of the crowd but from the belated efforts of those at a dis tance from the market who give orders on the basis of quotations a day or two old. All active traders tend to be swerved from accurate calculation by mar ket rumors, tips and the desire to be doing some thing, even tho an intelligent course of action cannot be laid out for the moment. It has been calculated that, in the period of on the New York stock market there were sixty-five periods of up ward movement of stocks averaging generally an ad vance of 7% points in thirty-three days, and sixty five downward movements, averaging a decline of 6% points in twenty-two days. To operate on the basis of these 5 and 10 point fluctuations is scalping. It is a business, in itself, requiring access to the tape or a trading board. With this business the investor should have nothing whatever to do.
3. Accidental security market is the most perfect organization extant for discount ing the effect of expected future events but notwith standing this, the unexpected is always happening. Such accidents were the Union Pacific corner of May 9, 1901, the McKinley assassination, the crop failure of 1901, the Balkan Wars, the Northern Securities suit in 1903, and the San Francisco fire of April, 1906. Such events usually cause only brief effects, if business conditions are sound, but they are more serious when they reenforce a previously existing downward trend.