Tides, Waves, Ripples

At the turn of the century. Wall Street was run by men in muttonchop whiskers, high square derbies, baggy trousers; they thought of stock prices as unrelated quotations on individual issues, often the result of manipulation. Charles H. Dow, a small, precise man, first editor of The Wall Street Journal, had a different idea; he had been keeping averages of railroad and industrial stock prices since 1897, had found beneath individual fluctuations a trend of the market as a whole.

Charles Dow died in 1902 without having made much impression on cynical Wall Street. A subsequent editor of the Journal, florid William Peter Hamilton, embroidered the idea, told men in pegtop trousers and telescope hats that the averages forecast both business and market trends. In 1922 he published The Stock Market Barometer, first comprehensive book on the Dow Theory. William Hamilton died in 1929--a few weeks after he announced that the greatest bull market in history had ended: "On the late Charles H. Dow's well-known method of reading the stock market movement from the Dow-Jones averages, the twenty railroad stocks on Wednesday, October 23 confirmed a bearish indication given by the industrials two days before. Together the averages gave the signal for a bear market in stocks after a major bull market with the unprecedented duration of almost six years."

Third and most influential champion of the idea is Robert Rhea (pronounced Ray), a Colorado Springs invalid, author of The Dow Theory, textbook published in 1932 at the bottom of Depression I. Printed at his own expense. 91,000 copies have been sold. Robert Rhea first went to Colorado Springs in 1910 with tuberculosis, in three years was pronounced cured. But in the air service during the War he had a minor crackup, got influenza and pneumonia, was discharged as permanently and totally disabled. Seeking relief from pain in utter exhaustion, he worked in bed at market studies begun earlier, finally completed the exacting task of charting Dow-Jones industrial and rail averages from January 1, 1897. These charts, magazine articles and his textbook covered his bed with fan correspondence from Dow Theorists. Then he started an interpretive-letter service, which is now prepared with the help of a staff averaging 25. Last week his 205th interpretive letter went to 5,565 subscribers throughout the world (by air mail in the U. S.). Typically, it commented on both the primary (year-to-year) and secondary (month-to-month) trends of the market; reminded subscribers that the former ''continues to point downward." said that the latter's trend will be shown by consistent upward cr downward swings of both averages.

No tipster, 50-year-old Robert Rhea likes to regard his subscribers as students, tries to teach them to read the auguries themselves. He warns them that the theory is not infallible, is not very definite, shows direction not distance, often gives no positive signal until much of the movement has passed. That it has worked for High Priest Rhea, Certified Public Accountant O. M. Williams certifies as follows: "I have audited the accounts of Robert Rhea and those of a corporation and two trusts operated by him and for his benefit. . . . My findings were that on total transactions [over nearly a ten-year period] involving 601,612 shares, a gain of $436.19 was realized for each $100.00 of loss." Aside from trading, his 5,565 clients at a yearly fee of $40 a head provide a neat income.

The Theory--which is in fact less a theory than an empirical rule of thumb-- is simple enough in itself, not so simple in application. It presumes three simultaneous movements of stock prices, which may be compared to 1) tides. 2) waves. 3) ripples. Speculators try to ride the tides, sometimes duck in & out of the big waves; only the reckless try to profit by the day-to-day ripples. To judge whether the tide is ebbing or flowing, an observer watches the height to which successive waves lap on the beach; if the tide has been coming in, and the waves fall shorter & shorter. he suspects the tide has changed. Dow Theorists indeed watch two beaches, note the waves of both industrials and rails, do not act until one confirms the other.

In March 1937, High Priest Rhea. although he could not say definitely that a bear market was beginning, cautioned his subscribers to think of protecting profits they had made in the bull market since 1932. Six months later, the Dow Theory gave a definite signal that the U. S. was in a bear market (ebb tide), had been in it since March. Thus, because it was succeeded by a wave with a lower crest and a lower trough, the March wave was proved to have been the high mark of the 1932-37 incoming tide. When September's definite signal was given, the Dow-Jones industrial average was at 165; speculators who then sold stocks have avoided a loss of more than 50 points (industrials ended last week at 114).

By last week, though the tide was still indicated as ebbing (i.e., primary movement tending downward), a 7-point rise in the industrial average since May 31 encouraged a bullish hope that ripples might top previous crests of 121 for the industrials, 23.5 for the rails, thus show the current wave to be coming in. This week's Rhea letter said that every upward zig-zag step, if confirmed by both averages, would be bullish, but a downward zigzag prior to penetration of 121 and 23.5 would mean danger.

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