Seeking The Perfect Market Indicator

by David Jenyns on November 9, 2007

The search for automatic investing technique schemes which would produce profits by giving investors advance indication of market swings, based on a mechanical interpretation of market data has been going on for quite some time.

One of the earliest methods was the “Dow Theory,” a set of rules for interpreting market action drawn up by William Peter Hamilton about 40 years ago, which were roughly based on the writings of Charles H. Dow. The question of how to apply the various Dow Theory rules is still subject to considerable dispute among adherents of the method, and the battle of reliability is still being bitterly contested by its supporters and detractors.

The search for mechanical market techniques accelerated after the 1929 crash, which had revealed not only the treacheries of emotion but also the frequently appalling inadequacy of even the most reputable investment advisers. The well-known debacle of the closed-end investment companies during the period following the crash, including those managed by some of the best-known names in Wall Street, indicated to many observers the near-impossibility of reliably predicting the course of stock prices.

A striking result of this sad situation and perhaps the quaintest automatic investing technique ever invented turned up in this field. This was the so-called “fixed trust.” The idea was for the trust to include in its portfolio only securities of what were universally regarded as the “best” corporations. Once set up, the portfolio was to be fully protected from the dangers of investment management. It was not to be altered in any way or for any reason . . . except one. If any corporation stopped paying dividends, its stock was to be forthwith sold. Naturally, by the time a company passes its dividend, the price of the stock usually reflects the fact that it has been in hot water for some time, so this neat gimmick did nothing but insure that stocks would be sold at true distress prices, with the inevitable deterioration of the trust’s asset values. Fixed trusts are no longer an important part of the American investment scene.

Stock market forecasters did not stop forecasting during this period, but their results were far from outstanding. A famous study by Alfred Cowles, covering the period from 1928 through 1943 and including 6,904 forecasts of the market as a whole made by 11 experts, showed a score, on average, of about two-tenths of one percent better than random guesswork.

Investors did not stop losing money, either. Results of an exhaustive research project conducted by Paul Francis Wendt covering the period 1933-38 (on balance, an upward period for the market), indicated that only 21.8 percent of a sample of typical customers came out with a profit.

Beginning in the thirties, large numbers of automatic investing techniques were developed, bringing into existence dozens of charts, tables, trend lines, moving averages, breadth and depth indicators, complicated mathematical computations, economic indexes, banking data curves, adaptations from the recondite areas of physics and chemistry, and plenty of others. By now, it seems that every available set of statistical data has been put to some use as a forecaster of stock market trends, no matter how tenuous the connection. There is at least one investment adviser known to the writer who predicts the mysterious movements of stock averages by following the no less mysterious movements of celestial bodies.

As long as investments have been around, people have been speculating as to how to get a hold of knowledge that no one else has. Learning the market, talking to others and paying close attention to what’s going on around is a good place to start searching for answers.

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