Depressions or recessions are caused by basic economic changes of supply or demand or credit. What leaders say about circumstances cannot in itself help or hurt the situation, except perhaps for a few days. Talk just doesnt matter. If an apple is rotten, the act of saying so will not make it ripe. If its ripe and someone calls it rotten, it will not turn rotten on the spot just because of this characterization.
Recognizing The Bear
How do you know when you are in one? One basic approach was defined by Charles H. Dow in a Wall Street Journal editorial of July 7, 1900. This premise still holds today. He called it The Great Law of Action and Reaction. Today, it is generally known as the 50% principle.
The sum of what Dow said so many years ago was:
It is a remarkable fact in speculation that both the average price of a number of stocks and the price of individual stocks show strong tendencies, both in rallies and relapses, to reach one half of all the primary movement. When a stock falls ten points in a comparatively direct move, it is extremely likely to rally as much as five points from the lowest. It often rallies or relapses more than half of the original swing, but it is generally safe to wait for about half. A Comparison of the Averages shows how regularly this movement occurs. When a recovery does not come near being one half of a decline, it generally means that the primary movement has not been completed and that a new low quotation will be made.
Thus we might draw these conclusions, based on Dows idea:
1. Following a major market advance, if, on the subsequent correction, the (Industrial) Average holds persistently above the halfway (50%) level, the odds favor the highs again being approached (or bettered).
2. Conversely, following a major advance, if the subsequent retracement or correction goes below the 50% level, the primary direction can be considered to have turned down. The preceding lows may then be approached (or passed).
3. Following a bear market, if a bull move succeeds in retracing 50% or more of the previous bear market decline, the odds then favor a new bull markets approaching or bettering the old bull market high.
4. Following a bull market, if the next bear market succeeds in erasing more than 50% of the total bull market gains, the odds then favor the bear markets testing the old bull market low. This principle applies in many fields, not just the stock market. If what I say in this book applied only to the stock market, it might be valueless because the market is made up of nothing more than peoples opinions. What they think and do makes prices move. So, to understand the market, we must also try to understand people and their motivations. We must also factor in social, political, and cultural aspects of human behavior when making a market decision. One must act contrary to the majority view at the proper time and in the proper way.
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