4. Technical conditions.—A man's physical condi tion depends principally upon certain influences such as amount and kind of food, and amount and kind of work and exercise. But if he once becomes very strong or very ill, this fact itself tends to affect later conditions of health. To change the simile; the move ments of a machine are partly governed by the laws of the machine itself, its construction, materials, strength and defects, as well as by the steam or elec tricity which is the outside motive power. To draw an analogy, stock prices are, in the main, governed by fluctuating values. But once speculation sets in, prices are often largely determined, for the time being at least, by the laws of speculation itself—in other words, by "technical" conditions.
The speculator who has bought, may sell in order to close his transactions. When a large number of speculators have bought "long" the market is threatened with a large' amount of sales which must sooner or later be made—and vice versa when speculators are generally short purchases must even tually be made to "cover." The former condition is called an "overbought" market and the latter an "oversold" market. Both constitute a species of unstable equilibrium which is easily disturbed and always is distributed sooner or later. It is to this de velopment that we must ascribe many of the sharp move ments downward in a period of advancing prices and the sharp rallies in "bear" markets.
Experience shows that the price movement in either direc tion is constantly overrunning itself in this way and react ing, and it is an axiom in Wall Street that reaction is more or less proportioned to the action that it follows. Many people claim that on a fair average reaction will be somewhat about half the action previous.
The reactions that come from these various specula tive endeavors constitute the technical condition. Thus, a stock may decline for a while wholly because of speculative or technical considerations, irrespec tive of any question of value. For example, a weak pool may boom the stock, and banks may later on call loanS' on the pool and force it to dump its holdings overboard.
In the discussion of speculative or technical condi tions we may also include the question of whether the supply of stock in the Street is ample or limited. If there is a small supply in brokers' hands, speculators may easily shove up the price. Of course the fact that the floating supply is small is often attributable to the fact that the stock possesses intrinsic value and has therefore been bought up by discerning investors.
Last, among the extrinsic influences are those of a strictly temporary nature, such as false or unimpor tant rumors. Certain groundless fears or hopes play a part, at least temporarily, in the fixing of prices.
It will serve no purpose to examine further into extrinsic factors that govern stock prices. Because of
them, speculation can never become an exact science, for even the most seasoned and experienced speculator can never foretell what effect these factors will have. Often their effect is just the opposite of what experi ence and reason would lead one to expect. Only pro fessionals can make a living by the kind of speculation that rests upon profiting by such changes. They are able to do so only because they have no commissions to pay and do not try to predict these unexpected price movements, and merely use their exceptional facili ties to take advantage of them as quickly as possible. The average man in conducting his stock transactions, is sure of only one fact—that prices, in the long run, are governed by the changing values of property.
5. Importance of extrinsic influences.—The impor tance of extrinsic influences is well illustrated by a letter of President H. G. S. Noble of the New York Stock Exchange. This letter, which appeared in the New York Times of August 3, 1915, was Mr. Noble's reply to an editorial in the Times suggesting that the Stock Exchange suppress excited speculation in war stocks.
In the interest of arriving at a clear understanding of this question the following facts must be borne in mind: Any event tending to disturb the equilibrium of security values brings about a period of speculation which lasts until the equilibrium has been readjusted. The greater and the more far-reaching this disturbing event happens to be, the longer and the more excited will be the resultant speculation. A historic example of this can be found in the experiences of our Civil War. That great national convulsion, accom panied by a suspension of specie payments and the issue of paper money, created a speculation of unprecedented magni tude. The Stock Exchange of those days was a small organ ization doing business in a primitive way, and when the great war speculation came, it refused to enlarge its facilities to meet the new conditions, and thus virtually did what was in its power to impede the rising speculative tide. The result was that speculation, finding itself choked off from the regu lar organized channels, proceeded to form new and unorgan ized channels for itself, and a great continuous, and unregu lated market was established in the open street to carry on the business that the daily "calls" of the stock exchange were incompetent to handle. The mania for trading on the war news of the day was such that the market did not close in the afternoon hours ; but was transferred uptown to the lobby of the old Fifth Avenue Hotel, where it continued during the evening. Out of this unorganized market there grew the "Open Board of Brokers," which the old stock exchange was finally obliged to unite with in 1869.