Six Commandments during Recession

By Adam Lass
Recession? Depression? Nascent recovery? Market bottom? Dead cat bounce? Lock a Washington economist, a Wall Street analyst and a Main Street broker in a room, tell them their lives depended on what they said next, and you’d still get five different answers, not a one but so much practical use.

By now you have probably caught on that I have a definite opinion on this matter (my bearish stance has become legendary around the Taipan Publishing Group coffee room) and what you ought to be doing about it (buy puts!).

But heck, I’m just one guy with a mere 30 years or so of business experience, and I write for a small outfit out of the somewhat less-than-major financial center that is Baltimore, Md. Why should anyone listen to me (other than the fact that I have pegged this entire crash to a tee)?

The Old Guys Say “Sell!”
What if I told you that the oldest technical indicator in the book – a system of signals established by the best-known name in the financial business – was telling you to sell blue-chip stocks immediately?

First, a little back-story. Okay, a good bit of back story, but bear with me and I promise to get to that sell signal (and what you can do about it) in the end.

Back in the days when beards, tails and top hats were de rigueur for gentleman in the financial biz, Charles Dow wrote a series of 255 editorials for his quaint new paper, The Wall Street Journal.

After his death, William P. Hamilton, Robert Rhea and E. George Schaefer took his various cogitations, stray comments and bits of sentiment, and hammered them into a cohesive “Theory of Everything.”

The Six Commandments
This eponymous trading system had six primary tenets:

1: The market has three movements
Major trends last one or more years, secondary reactions retrace the major trend over some 10 to 90 days, and short swings oscillate within reactions over either hours or days, depending on whom you ask.

2: Market trends have three phases
Accumulation (when insiders are buying a into a good deal), public participation (when every Tom, Dick and Harry gets involved), and distribution (when the wise guys sell off their shares for profit).

3: The stock market discounts all news
Also known as “the efficient market theory,” there are three flaws to this idea of a level playing field. The first presumes that all companies are completely transparent and all information is universally available. The second presumes that this information is universally understandable. The third is that investors will always act in their own best interest.

(Now things get interesting: While the first tenet is technical in nature, relating to the time it takes for the market to uptake ideas, and the oscillating reactions to that uptake, the second two are really philosophical, relating to our presumed intelligence and sanity. But with item 4, Dow et al. resume contemplating empirical data.)

4: Stock market averages must confirm each other
Back in Chuck Dow’s time, our buying population had spread from coast to coast. Industrial centers were cropping up all over the darn place, and raw materials were even further astray.

It was all well and good to set up a saddler in St. Louis. If you want to make money, you have to be able to get cowhide at a decent price from Montana and then profitably ship your saddles to riders in Philadelphia.

So the gist of this rule is that an increase in manufacturing isn’t a trend until it is confirmed by an increase in shipping. The same holds true in inverse: It ain’t a genuine bite-you-where-it-hurts bear market until the steam ships stay in port and the railroads stop rolling.

5: Trends are confirmed by volume
This one’s easy: Trends aren’t hiccoughs, twitches or momentary indigestion. They require the full force and faith of millions of investors putting their money where it matters.

6: Trends exist until definitive signals prove that they have ended
Finally, Dow lived in an era where science was remaking the world. Because he trusted the tangible over the ephemeral, he tried to link the concept of physical momentum to the psychology of crowd behavior. To wit: “A market in motion tends to remain in motion.”

So What Happens Now?  Continued...