who might have been most directly instrumental in bringing the US Great Depression to an end.
Three analysts and a little over 150 people, but of what kind! Those people managed to make a fortune during the American history’s largest economic downturn and preserve it during such a difficult period.
Our story is about the very three analysts who managed huge capitals on one warm spring evening, probably, being unaware of this, voiced only their point of view and made forecasts of further developments in the stock market.
On 24 April 1934 the American Statistical Association organized a dinner at the Roger Smith restaurant in New York. It was attended by 161 people. The main topic for discussion at this event was ‘technical methods of price forecasting in the stock market’.
Donald W. Ellsworth, the then chief editor of Annalist, chaired the meeting. He started the discussion of the above topic with a reference to the fact that the stock market was influenced by not only economic, but also political forces. So, any person who strove for success in forecasting prices in the stock market should surely take both these factors into account. Mr. Ellsworth emphasized that there were at least two aspects that made price movements in stock markets different from the ‘complete probability’:
1. unlike probabilistic data, prices cannot have negative values;
2. that prices are attached to profits naturally limits the level they can reach.
The event participants also discussed the interdependency between the probability phenomenon and price behavior. Dr. Frederick Macaulay pointed out that a normal curve is only one of possible outcomes of probability distribution. For example, take dice and fill one with a little of lead, and this will result in asymmetric distribution. In many respects this follows the nature of price movements in stock markets, especially if you imagine a situation in which dice are filled from time to time with lead in turns (i.e. replace each other). Shorter price movements tend to normal distribution, which does not apply to more extended fluctuations.
Harold M. Gartley was among the first analysts to take the floor at the meeting. He presenting his ‘technical approach’ and expressed his opinion that people involved in forecasting prices at stock markets should be specially focused on economic and political events affecting the market. They also should not ignore information that is part of movements of the market itself. In his opinion (opposite to the widespread sentiment) market changes that occur on a certain day may, with a certain degree of probability, show what will happen the next day in the market. (It should be noted that this approach was already known at that time. Charles Dow’s theory was the most significant manifestation of this approach.)
Proceeding with his speech, Mr. Gartley said that any market movement forecaster always faced two main problems. Firstly, he had to pinpoint when exactly to buy or sell certain shares. Economic figures that could be useful in dealing with this task usually are published too late and are of no value. The second problem was that one had to determine which exactly shares to buy. These are the eternal questions that Dow’s theory does not answer.
In conclusion, Mr. Gartley expressed his opinion and said that if a forecasting system became so widely used that it was popular among most speculators, sooner or later it became useless.
Richard W. Schabacker, Forbes’ financial editor, was the next to take the floor. He spoke on ‘The Logic of Technical Approach’. In his opinion, the fact that they often help investors avoid large financial losses is one of the main advantages of market analysis approaches used by people mainly focused on market movements. The stock market has a trending nature. As long as buying prevails over selling in the market, the trend is upward and on the contrary, when sellers dominate buyers, the trend is downward. It is not necessary to understand why buyers or sellers prevail in the market from time to time. You just need to take it for granted and use it to your own advantage. As soon as the market trend changes, the trader also has to change his position in the market, while technical analysis rules help to do this practically without any extra deliberation.
Mr. Schabacker supported his thesis with a few illustrative examples, including the following:
1. When the trend gradually degrades into a range (starts subsiding), the trend might soon reverse in the market.
2. The Inverted Head and Shoulders, a reversal pattern, shows that a bullish trend will soon appear.
3. When the price retraces up to 70% of previous growth, the current price fall is most likely to continue.
James F. Hughes, an analyst at Charles D. Barney and Company, was the third to take the floor. His report was entitled ‘Medium-term Trading’. He started his speech with a statement that medium-term trading offered a couple of advantages over the long term. Medium-term price movements last 1 to 6 months and, as such, allow the speculator to make 3-4 times of what he could make trading the long term. In his opinion, the best technique of forecasting the direction of future movement involves using tips of the market itself.
Mr. Hughes emphasized that this type of forecasting was fully based on probability. In some cases the rate of repetitive occurrence of certain market situations was high enough to successfully forecast price changes. For example, in 1929-1932 there was a bullish trend during summer and winter periods of market movements and mostly a bearish one in spring and fall.
At the end of their discussion and in response to multiple requests from the audience, each of the three speakers made a market forecast for the near future:
• H. Gartley – now the Dow Jones Index is at 105 points. The price is very likely to break the 1933 high between the current date and 10 October 1934, i.e. will grow at least to 128 points. A falling trend will persist in the market if the 1933 October low is broken before the above 1933 July high is.
• R. Schabacker – the market is likely to continue moving in a trading range without any sudden price moves within the next 6 months. A little growth is possible within the next two months.
• J. Hughes – the current situation obviously plays into the bulls’ hands. If the spring does not show expected price growth, this growth is likely to occur in summer.
From the Editor's Office:All speakers at that meeting were of the same opinion regarding the near future of American economyeven though they advocated absolutely different approaches to analysis and forecasting the situation in the stock market.Nevertheless, all three were absolutely right.In late 1934 the Dow Jones Index resumed growth and never came back to levels of the post-Depression period in the American economy of 1929-1933.We can only guess if this was facilitated by ‘huge money’ that attentively listened to the speakers.
