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CHAPTER 1

CAN ANYONE PREDICT THE FUTURE?

Do you believe anyone can accurately predict the future?What if we predict that the sun will set in. the west tomor-row afternoon? That is a prediction of the future, is it not?'What if we predict that tomorrow morning's high tide will befollowed, in about six hours, by a low tide? Such predictionsare sure to come true, for those events have always occurredin the past. We find that certain events in our world areextremely predictable, since they are controlled by the pre-cise Jaws of science and nature.

What if we predict that tomorrow will be cold becausethe weather map shows a cold front moving toward us? Thisprediction will probably come true, but it is not a certainty.The cold front could unexpectedly change its direction andnever reach us. The predicted event has usually happened,hut not always. This prediction is in the realm of probabili-ties.

'What if we predict that the stock market will go up in-flefinitely because of increasing inflation? Such a predictionprobably will not come true. The prediction is based on theAssumption that inflation will become the most importantfactor affecting the stock market. Careful research showsthat other factors in the stock market are frequently moreimportant than inflation. The predicted. event has never

3

4 CAN ANYO:'1F: PRF.J)Jr.T 1118 FUTURF.?

happened, for past history shows that hull markets havealways been followed by hear markets.

What if we predict that the world will come to an endnext month because of tlle positions of the stars? There ispractically no chance at an of this prediction coming true,for it has never happened in the past, and them is no logicalor scientific basis for Ihe prediction. This one is certain notto come true.

We find there are fOIlT broad olassillcatlonsIn which pre-dictlon~~~l!Ilu!,uallybeplaced for evaluation:

1. Predictions whfch are certain to come true.-WlleIla"lJfPdietion is hase(j~~pre~ise laws of science

and nature, and tile event has always happened in thep:lst, the prediction is sure to come true.

2. Predictions which probably will come true.--wl;~I;-a prmjiction is based on logic and facts, and the

event has nsuallv happened in the past, then~ is a proha-bility that it will come true,

3. r..!~edictioJ1swhichprobably will not pome true.When a predicted event has seldom happened in thepast, and the prediction is not based on Iacts or logicalideas, it prohahly will not corne true.

4. Predictions which certainly will not come true.-When a predicted event"h;s never happened in the past,

and the prediction is based all suppositions r-ontrary tothe laws of science, and nature, it certainly will not cometrue.

One of the most pnl1lid'7ed predictfons in recent ye:lrs wasin newspaper articles in March, 1962: At that time manyHoly Men of India were predicting the end of the worldwould come in a matter of weeks, Their prediction was basedon the positions of the stars and planets. Many people inIndia, and some people in other countries aetna Ily believed

CAN ANYONE PREDICT THJ<~ FUTIIRE? 5the prediction. The Holy Men were greatly respected, andthey were unanimous in their prediction.

As the day of reckoning approached, thousands of peoplewere saying their last prayers on the shores of the GangesRiver. When the world failed to end, many people in Indiasaid they had not helieved the prediction, but it did not hurtto say a few prayers anyway.

When we stop to analyze that prediction, we find it wasnot based on facts (unless you believe in astrology). lbe pre~diction was based on false assumptions contrary to the natu-ral laws of science, and the event had never happenedbefore. So that prediction was certain of failure.

Some predictions have great practical value. A sales man-ager can freguently make an accurate prediction that a cer-tain percentage of contacts made by his salesmen will resultin actual sales. Why? Because it has usually happened thatway in the past, and the salesmen consistently use methodswhich have worked in the past.

Insurance companies can predict that drivers under theage of 25 will have more accidents than drivers over 25.Why? Because it has usually happened that way in the past,and it is a fact that young drivers have a tendency to takemore chances than older drivers.

We can safely predict that the stock market will continueto fluctuate, with every hull market followed by a hear mar-ket. and every bear market followed by a hull market. Sucha prediction seems probable because it has always hap-pened that way in the past. It seems logical to believe thatthe large groups of people, who cause market fluctuationswith their huying and sP1]jng, will continue to experiencealtemgting periods of excessive optimism and excessive pes-simism.

Sometimes the facts on which predictions are based, arenot widely known. Such predictions can give the impression

6 CA N ANYONF: PIIF.OlCT THE FUT"lJm:? CAN ANYONE PREDICT THE FUTURE? 7that the person involved might have extra-sensory abilities.Let me tell yOIl the true slor)' of how I predicted fonr highspeed tire Failures in Four different automolnles.

The first time was in 1950 when I was a pnssenger in a carbeing driven hy a y(·ung Indy in California. We were drivingalong the twisting roads, way IIp in the brush-covered hillsabove the Rose Howl in Pasadena. We were traveling about50 miles per hom when r ,kteded a signal which enahled meto predict that a tire WOld" blow out in a few seconds.

I shouted, "Slow down] Something is wrong with a tire."My friend ohediently applied the brakes, and we had

slowed to about 20 miles per hour when the right front tireblew out with a hang. "VI' were going so slnwly that the carstopped safely without difflenlty.

My friend was amazed that I had predicff'd the hlow-outbefore it happened. I tried to tell her there was a logical ex-planation, but she insisted that I was olairvoyant-sthat Jcould sense thill~S heyond the normal ran~e of most people.So who was I to argue with the young lady?

The second time was about a year later, again ill Califor-nia. That time r was driving alone over the Cajon Pass, head-ing for the (lesert country, I was cruising about 60 miles perhour when I ddected the same signaL Agflin I predicted ablow-out within a few seconds. I applied the brakes andhrol1ght the car to an easy stop, but then~ wns no blow-out,

J got out and walked around the car, looking at the tires,hut I could see nothing wrong; When I got down on myhands and knees to look under the car, I saw where the trou-hIe was.

H was the right rear tire. On the inside sidewall, there wasa knob thec;i7,p. of a baseball where the tire cords hadstretched and broke» to the point where a blow-out was onlya matter of a few seconds driving time. T immediately letmost of the air ant of the tire to prevent a blow-out while

I changed tires. In a few minutes the spare was on, and Iwent safely on my way.

The third time was in Texas. Again I was driving alone,heading for Florida. While cmising through the prairie landat about 5.5 miles per hour I detected that ominous signalagain. I slowed down immediately, but I could not stop be-cause I was going through an underpass. I crept lip the in-cline, out of that underpass at only 20 miles per hom. Thecar was about 200 feet from a place where it was possible toget off the highway when the right rear tire blew out with abang. Again the slow speed at blow-out time prevented adangerous situation.

What was the signal that warned of an impending blow-out? It was a high speed humping sound, coming from thetire. The sound was not very loud, and could easily bemissed if one were talking or listening to the radio. Thebumping sound was caused by the knob which swells up onthe tire as the cords weaken and break inside tile tire. Mostpeople think a blow-out is always an instantaneous break ina weakened tire, but frequently it takes several minutes forthe weak spot to deteriorate to the point of complete failure.

If you find it difficult to believe that tire blow-outs can bepredicted, ask a racing driver about it.

TIle fourth time was early in 1957 e • The location is betterleft unmentioned because of the speed involved. Lwas.driv-ing a 1956 Thunderbird convertible way out in the country,with a young lady seated beside me. It was a beautiful springmorning, and the Toad was straight and level, Since it wasnot a main highway, there was practically no other traffic.

r asked the young lady if she was willing, and she said"Yes." So I stepped on the gas, and started the terminalvelocity run, We were going to find out how fast that Thun-derhird could fly.

Pretty soon the telephone poles were going hy mighty fast.

8 CAN ANYONF. PREmcr THE FUTUJm? CAN ANYONE PREDICT THE FUTIJRE? 9

Sometimes I wonder what would have happened that dayif I had not smelled the air escaping from that tire.

If you have not worked with tires, you may not know whattire air smells like. In that case, let some air out of a tire.You will notice a characteristic rubbery odor which is dif-ficult to forget.

In addition to m), four predicted tire failures, I have ex-perienced three blow-outs which I was unable to predict.Once I stopped to examine my tires when the bumping noisewas just caused hy a series of peculiar bumps in the road. Sowe can see that tire failure predictions are not certainties,but are in the realm of probabilities.

WJ1en I thought about how I had been able. to predictsomething as difficult to detect as an impending tire blow-out, I started wondering why I should not try to learn howto predict the course of the stock market. Had I not learnedhow to predict not just one, but a series of tire failures? Itwas the kind of prediction which many people would thinkimpossihle.

Why not analyze what it takes to make a correct predic-tion and apply that analysis to the stock market? Could Idiscover some facts about the market which were not gen-erally known and nse those facts to accurately predict thecourse of the stock market?

It would he nice to he able to predict the action of thestock market with certainty, but that could not be possible,for the stock market is not govemed by precise laws of sci-ence and nature. The exact laws of science control chemicalreactions, gravity, and various basic physical phenomena inour world.

The stock marketis not in the realm of pure science, for itis an artificial phenomenon created by man, and govemedby rules estahlished hv man. Stock market fluctuations arecaused by human actions resulting from human psychological

TIle speedometer neeelle touched 100, J J 0, J 20, and that wasthe limit. We were a little disappointed, for we had expectedmore from the T-Bird.

We stayed at top speed for only a few minutes, and thenstarted to slow down gradually. '''1p lind slowed down toabout 100 miles per hour when we heard a noise like a pieceof gravel being thrown against a fender. That was nothingto get too upset about, hut I put hoth hands on the steeringwheel anyway.

Then, a seconc1l:tter, I noticed the signal. But this time it'W~S a different signal. T smelled air escaping from a tire.

I did not know exactly what was wrong with the tire, hiltI had to make the unpleasant prediction that one of our tireswould have no air left in it in just a few seconds. I had 110

time to wonder how the odor could get inside the car at 100miles perhour. T knew that am lives depended on gettingthat T-Bird slowed down Iwfore all tl]f~ air escaped fromthe failing tire.

I took a really tight Wip on the steering wheel. deter-mined not In let it get away from me. Then a gentle touch ofmy foot on the rower hrakes, T watched the speedometerneedle slide down to f:l0, 80, 70. At 60 miles per hom theair was completely gone, and we started houncing. 111eneven [ess rH~S.mre on the power brakes.

I could tell hy the hnnnoe that it was the left rear tire. Iwas able to control the car, and we did nnt leave the roaduntil we had slowed down enough to pul] off on the shoulderand stop.

An examination of the tire showed a hole right in tllf~hot-tom of the tread wlwre a large nail had I)('en thrown (Jut ofthe tire hy centrifugal force. The heat and high pressureenlarged the hole to the point where air bel escaped rapidly.The sound we had heard was the nail striking the fender.

forces. Therefore, stock market predictions would have to bein the range of probabilities or improbabilities, like weather

predictions.In southern Florida, where I spend the winters, people

who have a knowledge of wind and weather patterns find itquite easy to accurately predict the weather. In that area,the changing winds usually shift around in a clockwise di-rection. Each change of wind has a different meaning. Theprevailing \vind blows from the southeast and sOl1th, bringingwarm, pleasant weather.

When the wind changes and blows from the west, therewill he an increase in humidity with a strong chance of rain.A west wind also usually means that a cold front is approach-ing from the nnrt.rwest. '''hen the wind changes to north-west, the cold front is upon us. Then the wind makes its nextclockwise shift to the north, and the cold, dry weather con-tinues as long as the north wind prevails. ~en the windswings northeastward, we know the cold wave is ending, asthe weather system moves ant to sea, away from the main-

land.TIle northeast wind hrings us slightly warmer, moist air

from the ocean. The northeaster frequently gets pretty rough,and may blow for several days before swinging ar0110d to theeast. The east wind nsnally lasts only one day, then movesto the southeast, and brings back the normal plensantweather. The weather ff'mains pleasant until the next coldfront approaches, and the same pattern is ff~peate(l.

A knowledge of such wf'ather patterns and the significanceof wind dirf'ction is valuable to people who are strongly af-fected hy the weather. One time I wan led to bring a sailingyacht fr~m Nassau to Florida, hut a strong north wind wasblowing. I knew the 180 mile cruise would be mighty un-pleasant, beattng into a north wind. I predicted that thewind would swing arouml to the nortl1f'ast in two or three

days, and I decided to wait for that prediction to come true.Sure enough, the dawning of the third day found me

powering out of Nassau Harbor. The sun rose as I clearedthe harbor entrance. Then the sails unfolded like the whitewings of a great bird and filled with a brisk northeast wind.That turned out to be a wonderfully pleasant trip with fastsmooth sailing on a broad reach-all because of my successfulweather prediction.

Another t.ime I was leaving Miami with the same sailingyacht, headmg for the island of Bimini, in the Bahamas. Itw~s early in the morning before sunrise, and still pitch dark.I like to get an early start when heading for the islands, so~he tri~ky approac.h to Bimini or Cat Cay can be navigatedm daylight. TIle tnp can take ten hours or more in a sailboat.

As I powered out the Miami inlet, I expected to find theocean fairly pleasant. for the previous day had been deadcalm. I was surprised to find a northeast wind starting tofreshen up, and the seas were running higher .than normal.Then the stars disappeared behind heavy clouds. My crewand I wanted to visit the islands, but as captain, I had to~ake the prediction that a northeast storm might be ragingm a few hours.

On an ocean trip in a small boat, or in a stock market ven-ture, I prefer to have the odds in my favor. So we turnedback to Miami. .. ';

It was still dark when we dropped our anchor in MiamiHarbor, and we went back to sleep. Several hours later,when we awoke, it was raining and windy. The weather con-tinued getting worse, until a real storm washlowing. Therewas thunder, lightning, driving rain and winds over 40 knots.We were mighty happy that we had turned back.

Later in the day we heard that two small boats had sunkin the ocean, and two large ships had been driven agroundby the high winds. That turned out to be the worst north-

12 CAN ANYONE PREDICT THE FlTTUTIE?

easter I had ever seen in Florida. The storm actuallv lastedfor Eve days. We could not get out in the ocean ag~in untilthe sixth day.

These two boating incidents help to illustrate the altitudeswhich might be developed hy an investor. ,i\'}len conditionsare not favorable, one should he patient enough to wait forthe right time to start on a venture. When the wind is right,one should weigh anchor in confidence and raise all his sailsto take full advantage of the Favorable wind and current.

One should realize that Favorable conditions do not lastforever at sea, or in the stock market. So one should try tomake as much progress as possible when tho wind is hlowingin the right direction.

The intelligent investor should also be willing to retreatwhen danger threatens. He should realize the folly of at-tempting to continue into an overwholming storm with allsails set. Many investors completely disregard nil the warningSignals and sail on blindly to their Ilnancial dcstrnction.

Knowledge is the key to rapid progress anr] safety. Evenif one is willing to he patient and heed warnings, he can notdo so without the knmvledge llf'edecl to understand thesituation and recognize the dnnger signals. One must studyall the aspects of An expeC'led venture to acquire the neces-sary knowledge. One should possess enough knowledge tomake some accurate predictions of what will probahly hap-pen in the near future.

I thought it might be profitable if I cOllld learn to predictthe stock market as well as Tcould predict the weather. Thebasic elements of prediction could not be too different. Ireasoned, that to make prcdiotions with a strong prohahilityof coming true, one must have a thorough knowledge of thesubject, based on personal study and observation.

One must learn which are really facts and which are falseassumptions. One must he ahle to tell what is logical and

CAN ANYON.E J'RET>ICT TIlE FUTURE? 13

what is not. One must discover what patterns usually causecertain actions. One must he perceptive enough to detectsignals which indicate that a change is starting to take place.

To successfully predict the future, one must know and un-derstand what has happened in the past, and what is hap-pening at present. Is not the future just a continuation of thepast and the present?

It is my helief that when a certain action bas consistentlybeen followed by a specific reaction, there is a probabilitythat the SAmerelationship between that action and reactionwill continue in the Intnre.

Predicting stock market fluctuations is much more difficultthan predicting the weather, for a great deal of false infor-mation is circulated about the stock market. One could thinkof the stock market as a hig game, with millions of playersbllying and sf'lJing stocks between themselves.

It is not a simple game, for many of us may be playingonly for small stakes, while some of our opponcnts are play-ing for millions of dollars. Many of our crafty opponents arehighly experienced and intelligent, as they must be, if theyhave become consistent winners.

Like the game of poker-the stock market game can hepretty rough. Some of the players are not absolutely honest,and will do things which would he called cheatiu'g in anygmm~.A few of thAm are occasionally kicked out of the game,::lnrlmay even end up in prison.

Some of the players will try to hluff you and provide youwith misleading ideas and information in their attempts towin. One should expect such tactics in any game where thestakes are high. '111e successful player must learn to copewith the misleading tactics of his opponents.

The stock market, like poker, is a game of skill and luck.If )'ou helieve it is an luck, you can not become a consistentwinner. TIle successful player must follow a skillful strategy

14 CAN ANYONF. PHEnrr:T THE FlmmF.?

ba~ed on a knowledge of facts. Like other gmne<;,there mustbe losers. The problem is to learn how to he one of the win-ners.

If you do not learn how to win, you will he playing onlyto provide profits for the more skillful player~. No ~attf'rhow inexperienced one might he, the other players WIll hehappy to have him in the game, for expert players could nottake much profit from a game in which all the players wereequally skillful.

CHAPTER 2,

HOW IT STARTED

My first few years in the stock market were not very profit-ahle. The best that can be said about that period is that Iobtained valuable experience. During my· early days in themarket, I knew the basic rules, but I had not developed adefinite operating program. I was like a poker player whowas in the game with a knowledge of the rules, but no planof strategy to outwit the opponents.

In those early days I was like the majority of inveslors-just trying to use my savings to make some money. I boughtstocks when they looked like they would go up. If they wentop, I took some profits. If they did not go up, I either soldthem in fear when they declined, or in impatience when theyjust stagnated.

Sometimes I bought or sold as a result of the advice whichwas offered from so many sources. There was so much con-flicting advice that I was frequently confused and hesitantabout how to proceed. T experienced small profits and largeprofits, as well as small losses and large losses. At varioustimes I owned just about every kind ofstockincIuding bluechips, growth stocks and some that were just plain stinkers.

My adventures in the commodity market were more spec-taoular, but not especially profitable. At various times I waslong or short in wheat, corn, oats, rye, soybeans, lard, cotton,cocoa, eggs, flaxseed and wool tops. Back around 1950 I was

15

HOW TT STATUEll

HOW TT STARTED 17tlm~e houses in two weeks. Several of the houses were rented,and J became a landlord at nineteen. Iworked at a full timejob dming the days, and I worked on the houses at nightand on my days off, painting and repairing. It was hard work,hut profitahle,

There was only one hank in our little town, and that iswhere all the escrows and financial details were handled. Icould tell that the bank manager was amazed to see a boyof nineteen buying and selling houses like an old pro, ar-ranging complicated deals and refinancings, and borrowinglarge amounts of money.

At the age of twenty-fom I was a building contractor. Attwenty-five Iwas president of a small corporation. Iwas themanager, but my mother and brother were always partnerswho would help out as much as possible.

With such a background, I regarded the stock market as apersonal challenge. I figured that if I studied hard enough,I should learn how to be successful in the market.I studied the stock market with detemlination, buying all

sorts of charts and books, and trying many advisory services.My study program even included high priced lecture courseson the market. There were so many different ideas about thestock market that it was quite an effort to determine whichwere really facts, and which were false assumptions.

When I realized there were so many conflicting ideasabout the stock market, I decided to approach my study ofthe market from a slightly different angle. I decided to adoptthe methods used by a scientist when he tries to solve a prob-lem in physics.

Iwould use deductive reasoning, cause and effect studies,research, experiments and mathematics. I would cast asidefalse nssurnptions and believe only what I could prove to betrue. I would draw inferences only from my own observa-

long in wool tops and enjoyed some thrilling clays when theywent up the limit for five or six days in succession. One timeI had so much oats if wonld have taken a smnll freight tralnto transport the actlHtl grain if T had wanted to accept de-

livery of it.Iwas just like the average investor, except maybe for one

slight difference-my determination to learn ahout the stockmarket. I though! I had a good chance for success becanse ofmy previous hackgro1\THl and experience.

When I was a youngster, mv mother, my hrother, and Ilived in a small town in Cnlifomia. We were not too well offfinanciallY, and there were times when we were on the re-ceiving e;ld of those bnskets of food which were passed outto needv families at Christmas time. When my older hrothergraduated from school, he joined the U. S. Air' Force and wassent to Hawaii. He sent home all the monev he conld to help

us out.When T grndnate(l from high school at the age of seven-

teen, Iwent to work immediately with an oil prodncing com-pany, doing ncconnting and clerical work. My interest inmathematics was put to good lise, for I spent many hours atthe calculating machine, nmking out payrolls and monthlyfinancial statf'lTIf'nts. It was a lot of responsibility for a seven-

teen year old hoy.I was still seventeen when my mother, my brother and I

pooled om mpager savings to Imy a little old c1i1apiclatedhouse in that small town. My mother and T fixed IIp thatbouse, with 11lP (loinft, the heavy work. of conrse. Vie sold itfor a good proRt when I "vas eift,hteen.

Then I really tool~ over as manager of our little real estateoperation. WP. honght ::l11othPf[rouse and sold it at a profit.Then another. and another.

When I was nineteen, there was a fime when I honght

HOW IT STARTEDHOW IT STARTED 19

Of course there were times when I WIlSso busy that allthoughts were concentmted on keeping the boat afloat foranother few hours. However, when the storms had clearedthere was plenty of time for basic thinking while runninzlong compass courses on lonely night watches. g

tions, rather tll!ln mnko deductions from accepted premises.In short, I determiTwd to study the market as a scif1ntist in-

stead of an economist.Using the srientific approach, I gradunlly pieced together

various facts nnd hits of information to develop an under-standing of how and why the stock market travels along inits complex movement. J kept accurate records of what Ileamed and the ideas I developed, weldin~ everything ofreal value into the complete theory which is presented in this

hook.Some of tllA charts in this hook are reprod11dions of those

which I madp n long time ago, and then studied for years.The charts have traveled many thousan(ls of miles with me,so I could study the market wherever I went. The chnrts andother study material were with me even when I lived onboats and traveled far from civilization. Mv studies con-tinued even when T cruised all over thp Great J .nkes, andwhen I live(l on sniling yachts in the United States, 1'.1exico

and the TIahama Tslnnds.I found that my understanding of the stock market in-

creased as my distance increased from the chattering ticker

tapes, rumors, advice and opinions.Far ont at sell, I was in a different \""arld. a world of basic

physical phenomena. There was nothing but the sea. the sky,the wind and my small hoat. 'rhere was time to think about

basic ideas.It was not unusual for me to get ideM about the stockmarket at sea. In fact, my best ideas seemed to arrive whenI was sailing out where the water was a thollsand fathomsdeep, with no land in sight. Out where the friendly por-poises play is where I felt close to the [rnsic facts of life. Inthe wilderness of the sea I felt close to the comprehension oftruths normally bflyond perCf'ption.

CHAPTER 3

BULL ~flARKETS AND nEAH MAHKETS

I leampd that people invpst in the stock market for manydifferpnt n~:lsons. Some peop1p are interpsted only in divi-dond income, while others care only for capital gains. Stillothers buy stocks [ISprotection against inflation. There arereopl(' who want stocks to give thpir children as an inhprit-ance, and there are some who are trying to make a fortune.There are hanks, corpnmt i011S,nniversiti('s, mntnal funds andretirement fnn(ls-all in the market for their own reasons.

All these diITerent ppop1e and institutions are representf"dby hrokers at the stock exchanges where many well knownstocks are hought and sold. The stock exchange works likea contin11ons anction where the hrokers 1111van(l sell stocksaccording to the instfllctions of their c\ipllls "frOlnall over theworld. If there are more 1111yorders, tlw price of stocks willhe hid upward, as 1111yerscompetc for the stocks. Jf thereare more sell orders, prices will go down. It is as simple as

that.No matter who buvs or sells, or for "vhat l"f'aSOllS,pricesare dp,termined hv th~ aetn:l1 forces of hnying and selling onthe floor of the -'exchange, in accordance with the Jaw ofsupply and demand. The resulting price changes are a con-sensus of all the knowledge', opinions and hopes of all. whobuy and sell stocks, regardless of their pnrpose.

As a gpnpra1 rule, prices do not fluctuate aimlessly. There

20

RlILL MARKF.TS AND BEAR MARKETS 21

is 1Jsually a tendency for price changes to move in trendswhich may go up or down, and sometimes sideways. When astock market trend becomes well established, the~e is a defi-nite tendency for that trend to continue for some time.. When an up trend continues for about a year or more, it.IS frequently called a bull market. V/hen a down trend as-sumes major proportions, it is caned a hear market.

My research has shown that bull markets have lastedfrom one to seven years. Bear markets have lasted as long asfive yea:s. I have found it extremely important to classifyall prevIOUS stock market action, dividing that action intohull markets and bear markets. Since butt" markets and hearmarkets have such completely different characteristics, it ishetter to think of them separately.

THE BULL MARKET

When an up trend first starts from the bottom of a hearmarket, it is dill1eu]t to tell whether it will turn into a bullmarket, or if it is just a hig rally in a continuing bear market.

. ''''hen an up trend first starts, it must gain enough tech-nicnl strength to pass a certain point. When that point ispassed successfully is when a bull market starts. Then the~nternal strength of the market will attract important buy-1Il? by t?e big money interests. The large volume and risiI;gpnces WIll attract more buyers who are anxious to get in nearthe sta:t. Thus, .tl~e.bull market is under way.

Dmmg that initial phase of a hull market, soon after itpasses that crucial point, is when the largest volume of ahu.lI m~rket USIWlIy occurs. That is also when the up trend of!mces IS strongest and smoothest. During that rapid advanc-mg stage, the reactions are usually small.

The smooth, powerful first phase of a hull. market usuallyends when a large reaction occurs. That reaction may last

22 RULL MATIKETS AND REIIR MARKETS

two or tllr~e months. Then tliPre are more large ralli('~ ;11)(1

reactions, as a top is heing formed. At thaI ~tage is when thehig profcssioual operators are selling their stocks to the pub-He.

When the market makes its highest Iinnl top, the volumeis lower than previously, and the tf'dlllkfll strength is lessthan it WIlS hefor«. That is when optimism is fit its height.Business is usually good at that time, and the [uture looksbright. There is frequently talk about a new era of penna-nent prosperity at that stage of the market cycle.

TIlE BEAR MARKET

When a down trend starts from some high point in 11 hnl]market, there is sometimes no evidence that it is not just an-other reaction in the bul] market until it passes a certainpoint. At that pt,int is where teclmical weakness hecomesim-pressive enough to attract brge scale selling. There may beanother rally or two after that point is reached. There mayeven be a new high registf'red hy the Dow-Jones IndustrialAverage. Such an unusual event has happened several timesin the past.

A good friend of mine S::lysthe big operators purposelypush -the DJTA 111' to a new high, at that point, in order tofool the stickers.

''''hen a hear market really gets moving. it is an awesomething to hehold. Prices drop with frightening speed andlarg~ volume. The selling pressure f)11ildsnp until it feedson itself. As prices decline, stop loss orders are touched offand become market orders to sell at the bost price avail ahle,These frequently set off chain reactions of stop loss selling.

When the market declines rapidly, margin calls are sentout to many people. Most of them will not, or can not, put IIp

nULL MAHKRTS AN]) BEAn MARKETS 23any more margin money, so their margined stock must besold at the market to protecl the lender.

When stock market crashes occur, millions of people losebillions of dollnrs, and Jose it much faster than they made it.Then is when the brokers' board rooms are filled with peoplewnlching prices decline and their savings go down the drain.TIHlt is when the typical investor sits there worrying, de-veloping ulcers and JlOping his heart will not attack him.

A hear market finally reaches bottom when everybody whocould be frightened into seWng has sold out. About the onlyones left in the stock market are those who absolutely willnot sell on declining prices.

A hear market is one of the greatest hazards faced byinvestors. Rapidly dropping bear markets have changedmillionaires into paupers in jnst a few weeks. There is notelling how much dnmagc has been done to the physical andmental health of investors by major market declines. Somemen have even committed suicide because of stock marketcrashes.

The stock market can he as cmel as the sea. One must re-spcct its power and navigate cautiously, There are timeswl1(>n retreat is tIle ')(~ststrategy.

VOLUME

VOLUME

Stock market stmngth is indicated;1. When the market g(~e~-~;p-<;l~heavy volume;2. When prices decline on low volume.

Stock market weakness is indicated'----._.. -. -. .~,~.-.,._-..•..-----._".~.~---'~1. When prices decline on heavy volume;2. When the market goes up on light volume.

A study of long term volume charts shows that volume isusually low when a bear market is in the process of makinga bottom, When a bull market starts, volume increases. Thevolume builds up rapidly dnring the strong upward surge ofthe early stage of a hull market. When the strong early surgeof the hull market is passed, the market continues upwardwith decreased volume. At the peak of the bull market,volume has usually decreased even more, thus indicatingthat the big demand for stocks has been largely satisfied.

At that time, right near the top, the market is just coastingupward on its momentum, like a rocket which has exhaustedits fuel. The rocket can continue climbing upward for quitea distance without fuel, because of the powerful initial thrust.But when the momentum is overcome by the pull of gravity,the rocket must change its course and start downward-un-less it turns out to he a multi-stage rocket. Sometimes, aftercoasting for a while, a rocket ignites a sec-ond fuel chargeand thrusts strongly upward again.

The stock market, like a rocket, can only coast so far with-out the thrust provided hy large volume, If that thrust is notprovided, the market will usually turn down. Yglug~SheI~show that constil]gaction, wgll_!!l!:""ll~ark~~t_g?i!!K"!~P_~~~~.J!~-crc~t~~~volume., !!~s:lPEe.~r-~d at every buIl_~~~Eket._~~p'"_~_~r-i!~gthe last t~ve.l~!y=t\\:£..Y~llE~~

A study of the charts shows that there have been severaltimes when a hu 11 market turned out to be a multi-stage affairafter it had coasted for a while on decreased volume. At those

CHAPTER 4

When T speak of volume, T mean tIl(' total ''''eekly volumeof all stocks traderl on the New York Stock Exchange. All ofthe statistkal data used in this book is 11nsed on the tradingactivity of the NYSE, for it is the largest aud most importantstock exchange in tlw world,

Weekly volume is used hpca11Se it is more important thandaily or ~H)Tlthly volume in analyzing the movements of ~hestock market. I consider weekly figures to he the most 1111-portant in stock market annlysi~. No <hily .fignrps of flny kindare used in this bOOK,as the dmly fluctuatlOllS of volume andpricps tenrl to confuse the majority of investor-so" A person can not oorrectlv visualize the size and shap,eof a forest if he is ton closelv surroU!1rlp!l hy tlIP trees. It ISthe same in the stocK market. To 111H1C'rstalldtIl(' rr-al s<'Opeand movement of thp market, one sho111d110tplace too muchimportanC'P on the rlaily flnetl1ations.

Volume Indicates, in a gpnpntl way, the amount of s11pplyand c1emnnrl for stocks. \\Then the stocK market gops l1p onheavy V0111111e,rhe rlcm:lnrl for slocks is much grcatPf thf1nthe s"upply. \Vhen the market gops clown on heavy VOll1111P,the sl1pplv of storks is mnoh grpater th:111tIl<' r1~m"~l(l..

Mv stlHlips sho\>" thnt volume and price nction 111(}Jcatesmar1~et strength or weakness in the [ollnwing manner:

24

26 V01,1IME

times, a !"enf'wed incr8ase in volnme sent 'he market climh-ing upward again, without the l1npleasant interrl1ption of abear market. Sucl: rpnewals of strength and volume occurredin d944-45, ;md again in 1854.1)5.

The hull market which laslpfl from Hl-19., to ]946 was atwo-st:1ge hull markd which rpnewpd its strength nnrl vigorafter coasting on low volume during the last pmt of 194:3-

The hull market which lnstrxl from 19,m to ]956 W:1Snlsoa two-stage bull market whkh came \'('ry dose to a majorInterrnptlon in 195:3. Many analysts still S:1)' the dpcline in1953 was a hahy 1)(':11'market.

The hull market of ]958·59 was only a single stage affair,and the hull market of 19(H was also a single stage adval1ce.

When lwar markets have started in the past, volmne washeavier on the declines nml lighter on thf' rallies. \Vlwn thecrash phase of a hear market flfweloped, volume increasedtremendously on the rapid dr-cline, indicating panic selling.

Panics [rave occllrred in thp past when people became sofrightened of the possibility of losing all thr.ir money, thatthey were willing to sf'11ant }It almost any price---jllst to getout of the declining mnrket.

My study of volume has left me with Ilw concll1sion that itis an important genernl nlf'asnrement of sllpply and demandand of market strength or weakness, hnt volume alone r-annot he used as a prcci~c timing device. Sometimes when themarket coasts upward, after a long rise, the decreased vol-ume will indirflle a top. At other times it will turn nn! 10 11ea 1111111i-stage hull market W!Ji0h starts l1p flgain, for another

)'em- or two, after coastin\! for n while on light volume." ( .. ,

The most impn-11nt ohsf'rvfltion gairH'fl from my sllldy ofvolume was that the top of every hllll market, during the1'l,s,t..'wenty-two years, has been accompanied by lower vol-ume than occurred earlier during that bull market. vVhen'one stops to think nhout it, such action seems completely

N---'.--- _ - -t"""lC'll)r--t--~IO'" on .. . ~ 0 '" 2 ~:'.l2 :! s1

.., '" '"'0

N

~-

'"m,. ..

.~'. --

I,

'" 5m

I,

- - - ---"- - -~ -

0-

~ - ,

-- -- ~-

~11 -

;0 ~ •• I

~~ l/>-~w •••x'":l~

-'f. ..lot

- - - _ ...~ 0,,->0

e . ~..• ~ i- "ze

..,0 4J.~~, J:

- . - -,r- ~

-'1-' -

; ;;; ;- ~ •

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I - . £' .'

i~~~~§~~~~g~~~~~f-!!t!~~:~g~~~~:~~~:;~.,To 3 I ~~ £ ~~ '" 0

-•• ••

VOLUME 29logicnl. It wnnlr] seem that a bull market could not end aslong as the volume increased along with the rising prices,because that would indicate a continuously increasing de-mand for stocks.

The Jaw of suppl), and demand states that prices must risewhen ths demand exceeds the supply. Therefore, before thebull markst can end, demand must gradually ease off to thepoint where it is exceeded by supply. Such a gradual easingof demand is indicated by declining volume as prices con-tinue to rise.

AnQ!he~._90nc.l~ls.i2.~..L~~!'l9!!~slwa~.lhat.1J~a.r markets are~t usually st~r.t~g..~Y'_s..!:l_qde!!l_1!..~~~Rected_qy.£.nt~uc!~~~.ars., disasters.j, IJre.s!cl!;nt~J!~gtr..tatt;!ckWl!:. e~~gj:1LtU!llilJJ!of a President. The evidence indicates that bull markets areonly tempornrily interrupted by such unexpected shocks.Then, after a sharp reaction, the bull market again continuesits upward climb until the power of its thrust has been lost.Only then can a hear market begin.

The majority of people seem unablsm understand that thestock mnrket cycle is not really governed by news items andbusiness conditions. The life of a bull market is c1etCI111ineclby its own infernal condition and the balance of supply anddemand for 8tncks. Many people, quite understandably, arcmisled to the point of complete confusion by daily pricefluctuations, conflicting opinions, rumors and misinformation.

I suspect that part of the confusion may be caused pur-posely by SOme of the high stake players who have been inthe game for a long time and want to keep on winning. Theyhave a definite advantage if their opponents are hindered byconfusion, fear and ignorance.

In the era hdore the Securities and Exchange Commissionbecame active, profeSSional stock pool operators actuallyhired rumor spreaders to frequent the board rooms to pass

680

Jl'MAMJJASONDJFMAMJJASONlJJFM

660

660 660

6Lo

620 DOW-.I!l11FSINWSnm.1 AVERAGE . 600600

580

560

. 580

560

!l80 .

15

WF:lIKLY VOLUME::lIT \'IF,FJ( MOVINn AVlffiAGE

10 10

19"8 19')9 1960J F II A II J J A SON D J F II A II J ,7 A SON D J F II

30

VOLUME 31

out tips and spread propaganda about the stocks being ma-nipulated by the pools. In those days the big bad boys usedeverytIling but guns to separate the suckers from theirmoney.

There are stiJl some skunks in the woodpile, trying toambush you-so take care.

, TIle most aCClIrflteway I found to evaluate the trend of[,weekly volume was to use a six week moving average of'weekly volume. The moving average eliminates the more:~rratic fluctuations, and smooths out the weekly volume'changes into a fluently moving line. The moving line clearly'Shows when weekly volume decreases as the market movesupward. .

Presented here is 11 chart showing the action of the Dow-Jones Industrial Average, and the six week moving averageof volume during tJle bull market of 1958-59. The first thingto understand on this chart, is when the top of the bull mar-ket occurred. The DJIA reached its highest point of the bullmarket in the first week of January,' 1960. But that was notthe top of the hull market.

The majority of investors think the DJIA is a true indicatorof stock market trends. hut there are times when it is not anflCCllmteindicator, and one of those times was in january,H160. That was a false move of the DJIA.

If yOllwill examine charts of the New York Times Average.the Herald Trihnne Average, Standard & POOl'SAverage andMoody's Average. you will Iind all of them SllOWAugust.19.59 as the highest point in the bull market. Why did theDJTA make the false move to a new high in January, 1960?I can think of only two possihle reasons:

1. Investors were more anxious to buy the thirty stocks in

32

VOf,tJJ\fE

the DJTA than tho stocks in any of the nrher market

averages2. The DJTA was puslwd up to a new higll hy hig operators

in order to fool the puhlic into thinking that the bullmarket was still going strong.I have no evidence on which to base a choice between the

two reasons, so I will just have to continl1c wondering about

it. The chart clearly shows the strong, smooth rise of theDJIA during the early part of the bl111markf'!, as it 'waspushed upward by the powerful thrust of increasing volume.Then, in emly 1959, the market continuf'd upward on de-

creasing volume.Notice how the voll1me line made a 1lf'Wlow in May, 1959

at the same time the nJTA m::lClea new high. At the vef)' topof the hull market in Jnly, 1959, the volnrno was considerahlylower than it had heen earlier in the l-ull market.

This chart is a classic example, showing how volume 11S11-ally decreases at the top of a hl111market, Such volume ac-tion is uswllly Found in all hun markets. In this CflSC, thevolume peak' ocenrred eight months hdore the top of thehull market. In other 1)1111markets, the volurne peak oc-curred at different times. Following is a record of the time he-tween voll11lle peaks and hl111market tops.

\V1H'nVOllllllPPeak Occnrred

null MarketTop Dnte

Jammry, HJ46-Fivc months hdore the top Jnne, 1946JaUllaf)', Ul55-Fourtefm months before t!1f' top March, )956Novernlwr, 1958-Eight months before the top Jnly, 1959March, H161-Eight months l)('£ore the top November, Hl61

Conrtesy of the New York Herald Tribune.

WeeklY Vol11111eis shown on accnrate charts which are"published every Snndny in the New York Herald Trihnne and

33

VOLUME 35the New York Times. Dming some 111111 markets, the volumepeak on the newspaper chart is obvious and easily recog-nized. At other times, the greater detail of a six week movingavcragc chart is needed.

I like to examine the Sunday stock market charts in theHerald Trihuno and the New York Times frequently, espe-cially at important tnming points. It is a good policy to fre-quently compare the action of the different stock averageswith the movement of the Dow-Jones Industrial Average.

If the DJIA would he the only stock average to make anew high in a hull market-while the other averages failedto make new highs, one could consider that to be a falsemove of the DJTA.

34

CHAPTER 5

THE TIME ELEMENT 37A precise understanding of bull and hear markets will helpus to form a correct analysis of future market action

The seven year long bull market which lasted fr~m 1949to 19.56 seems to indicate that there is no maximum lengthfor a hull market. The maximum duration of a bull marketis not dctenn.ined by the time element, but by the market'sown p.rogresslve weakness. which develops as a result of thechangmg forces of supply and demand.

THE TIME ELEMENT

In my exhaustive chart studies, I noticed that time was asignificant factor in hull markets. During the last twenty-twoyears, every hl111markd lasted a different length of time.The length of hull markets varied from one to seven years.

The important consistency nbout the time element is thatevery bull market lnstf'd for one year or more. The minimumlength of a hull market was never less than one year.

It seems that when enough strength is generated to start abull market, a powerfl11 force is created which is difficult tostop. It appears that a year is the minimum time rpquirf'd forthe life span of a hull market. It takes time to accumlllatethe strength needed for the rapid early growth of a bullmarket. Time is also required for the market to go throughits dying strnggles of the wide swinging rf'aetions IlSl1al1y

found in the top area.The one yenr minimum length measuremen! should start

from the time of the lowest price reached by the market. andshould end at the time of the highest price reached by themarket. The large rallies of 194R and 1957 diel not even lastsix:months, so they can not he thought of as hllll markets.

The recognition of a one year minimum )ife span for bullmarkets does not seem like a very import::mt item, hilt everystep we take which helps to dispel confusion, also helps. toclarify our l1n(lerstnncling of the factors WI' must work WIth.

36

Time is one of the two basic elements which combine toform trends. The other element is price. One could make thestatement in the fonn of an equation like this:

Time + Price = Trend.The changing prices and the passing of time gradually bringabout the formation of a trend. '

Such trends can he understood best by visual observationon a cha~t. A line chart presents a picture of time and pricechanges m a balanced perspective. Charts can be valuableaids in analyzing many kinds of data in relation to the pass-ing of time.

We should understand that time is an element with threetenses: past, present and f1Iture: We should know what has~ll1Pfened in the past in order to understand .what ishappen-mg 111the present and plan what action to take in the future.

'Ve.mu~t rea HzI' that the future will soon be the present.Tf action IS not tnken at the proper time, the opportunitvmay slip into the past and he lost forever. .I

market fluctuations, hut it did not seem to be accurateenough for me. The Dow Theory occasionally producessome false signals, and some of its true signals are a longway from the top or bottom.

Then therA were the methods which applied moving aver-ages to the Dow-Jones Industrial Average. There were alsomethods based on volume studies, group ratios, odd lotsand so on. Many of those methods were basically sound, butthey seemed to have a common fault. Practically all thetechnical methods had frequent whipsaws, resulting in smalllosses, during the times when the market would experienceindecisive rallies and declines.

I wanted a method that would only signal the actual he-ginning and the end of bull markets and bear markets.

One of the problems with some methods was that toomuch emphasis was given to the trend of the Dow-Jones In-dustrial Average. How can an average of thirty hIgh gradestocks show what the whole market is doing? None of thepopular averages can show exaetly wbat is happening to theentire market, for there are more than 1,500 stocks traded onthe New York Stock Exchange.

No stock average, by itself, can reveal the technicalstrength or weakness of the whole market. But it is ex-tremely important to know what the DJIA is doing, for themajority of investors believe that it really indicates the truemovement of the market. It is wise to keep track of theDJTA, so onf' can know what the majority might think themarket is doing.

About that time I came to the conclusion that it was notpractical to place the main importance of a method on anystock average. I reasoned that the only really practical thingwould bA to develop an accurate method of measuring thetechnical strength and weakness of the whole market.

The only indicators I knew that would cover the whole

CHAPTER 6

DEVELOPTNG A -METHOD

The m()n~ I Ipflrned ahout the stock market, the more Twanted to follow a methml for gelling in and out of hulland bear markets. A person can not exppcl to he successfulin the l11flrket, or anywhere else, without a ddinite plan of::lction. \\Tithont a definite method of operation, how ('0111<1 Ihe strong enough to sell out when hllsiness and economicconditions look so good at the top of a hull market?

If I h::ul no method to help me, how could I he hraveenough to buy ncar the hottom of a hpar market \",·henthings look so bad, and everyhody is pcssimist~e? H~w couldI be reasonably SlHB of taking action ::It the nght tlllW?

I felt that the only wnv to safely navignte the treachenHlstides of the stock mark~t was to have a set of Tnles as aguide for huying or selling as close as possihh~ to the right

times. f 1I examined all the existing methods T could find, for 1 e t

sure that somebody mnst have devf'1opNl n good mf'lho(l forconsistently identifying the heginning and ending of h1111 andhenr m::lrk~ts. Aft~r an, stock markets as such have heenopemting since shorilv after the Revolutionary War.

Of course, there was the Dow T11eof)l. T have great respectfor the now Theory, as it was one of the first major attemptsto scientifically measure the movements of the stock market.It brought sot"ne semhlance of order to the interpretation of

38

DEVELOPING A MF.THOD 39

market had berm right in front of me for a long time, hut Ihad never paid lTl1Ich attention to them.

Every Sunday the flnnndnl section of the llewspaper car-ried a Jist showing hoy,' many stocks had mndf' new highsduring the past week, ::mclhow many had made new lowsduring the week. Also shown were the number of stockswhich had advaTwecl during tlw weck, the numher which haddeclined and how rnnny had rr.mnincd nllchanged. Thosefigures showed what was happening to all the stocks traded

on the NYSE.I started ,'"arking with new highs and new lows and soon

had figured how to get an nccnrnte measurement from thf'm,I began charting tllf'm in a form which I eallcd the Index ofWeekly Net New Highs and New Lows. In the interest ofbrevity, I referncd to it as the NH-NL Index. TTpre is how I

obtained the net figmes:

DEVELOPING 1\ METHODDEVELOPING A MF.THOD

tl l' 41.

H' zero me As T t ,'t tl'exactly the ~am'e p'r'olI °1 lIS, seven years later, J still follow, .. ,. ce( 11re,

EXAMPLE: NF.\V HIGH - NEW Low INDEX

300

200

100o

100200

, •.. I

r-; N i 1/\L ~ot1 iN[4

~ .• ~

~~

'" t: ,V V \ -.:I

1961J F M A M JIJ A S 0 N D

.' .•

If there were more new higlls \llan new lows. I suhtractedthe new 10\'''s from the new highs to obtain the number of

net new highs for that week

EXAMPLE:New LowsNew lIighsNri New Lows

60-40

20

J quickly charted a NH-NL Index 'and found that it was indeed' n i covermg several years,ing technical market 'streng~tl an ImPkn°rtantfactor in measur-

1'1 ' .' " lor wea ess... ien I started working with a 1

found that the number 0'£ t k ( vluoh i and declines. I soon, s oc S w rich re lned Iseemerl to have no at,' ' , . mame UDe langed/ pparen importanc I .ing onlv with the advances . d 1 ce, so continued work-, . ~ . vances an t ie de l' I 1 1net filluTes just the sa ' 1 ..ln o meso ca cu ated the

If 't'here we , ., ~,e alsWIt 1 t ie net new highs and lows., ire moi e ac vance tl d I'

week, I subtracted Ihe'd 1', fS 1anI ec Illes during the.' co Illes rom t ie alb'lIP numher of net I, ,. < ( vances to 0 tain, '. H( vances.

EXAMPLE:New HighsNew LowsNet New Highs

100-20

80

If there wen' more new lows 111al1new highs. I suhtractedthe Dew highs from the new lows to ohtain the 1111Jllhf'xof net

new lows for that week.

EXAMPJ,E: AdvancesDeclines

Net Advances

900-300

600On the chart T placed all wef'kly net new high entriesabove the zero [ine, and all weekI\' net new low entries below

2 nEVFJ .OT'ING A MF.TTTOn

4 lIs I <;uhtnlclcdare (lccliTws I ran ~H vance, , .If there weff~ III the declines to ohtain the nl1mher of net

the aclvaneps .1 amdeclines Ior the week.

1 De l' Index to show the riseI wantce.l Ihis j\ elva

1nee anr k' ('t'C1.Il~~~way; that would r-om-

I f 11 f 1 11and 1eaf mar e s c •anc a 0 111 c .' I 1 1 to mnkc it a Cl1m111atIve..1 k crages so rae cpnrc with sl'oe av ~ , v. "'1'1 . ,I' I slmtpcl with a figure of

ind £ t 1 anees anr c ec meso .Inc ex 0 ne n< vr ' . I 11 1 tl18 number of netIt' (f figure ac c cc .zero. To t 10 star mh ' 1 [ net weekly.' ' r suhtracted the nU111)er a

weekly advances, o· [1 Po I In'pt a larcf.e sheet of1. T) kee tnlck 0' t w I1gnres, . t'

dec meso ( . P 1 1 Illations every week. Ipaper on ,,,,,hich T recorc ec I re ca curr .

called it the data sheet.

EXAMPLE:DeclinesAdvancesNet Declines

650-600

50

EXA~frLE:Allgust 20,1961

TotalNet Declines

TotalNet Declines

TotalNet Advances

TotalNet Declinp$

TotalNet Declines

Total

Al1gl1st27, 1961

Scplcmher 3, 19(3]

Seplember 10, 1901

Srpteml1ef 17, 1961

nEVF.T.OPING A MEnlOn 43

EXAMPLE: ADVANCE & DECLINE INDEX

IJ\

,.",1I\ •••r ~ . ( tt ~ '\ ~'l 1I V L ~

/ilI 1961'J F M A M J J A S 0 N D

11,000

10,000

9,000

8,000

7,000

9,fl38-12--_.-

9,621-209

For comparison purposes, I also charted the Dow-JonesIndustrial Average on the same sheet of paper. Timing my-self on several occasions, I found that it took me exactlythree minutes a week to make all the calculations and chartthe entries on the NH-NL Index, the Advance and DeclineIndex and the DJIA. Anyone who wishes to do the same willfind low priced chart paper available at many drug storesand dime stores.

Back in 1956, when I developed the Index of Net NewHighs and New Lows and the Advance and Decline Index, Ithought I had discovered something which no one else knewabout. At that time I had never seen or heard of an Advanceand Decline Index, or a New High-New Low Index. When Iasked my broker if he knew where' I could obtain lists offigures, going back through the years, showing weekly ad-

-9,352-+2.32-

9,584-372--9,212--1549,058

1] . kly totals. I still do it exactlyTlwn T charted on Y t 1(>, wee

the same way.

DEVF,LOPING A METHOD 4544 DEVEY,OPINr. A METHOD

. leklv new highs and new lows, hevances and dechnes a

111<.WIe .'t lking about. This lerlme to

did not even know w iat was a .} I 1 an original discovery.

belTiel:~~n1~~:;~\:n]jzed that I was not the firs! tfo diS.1

COtV

1er

t. li I 1 for I ounr 1Ueek1 Advance and Dee me nc ex,the w " Y . l' tent advisors were alsosome market analysis anr mvesm. .nnl sts used daily

. dvance and decline indexes. Some an, y.. .. 1 11~smg a 1i;~ others used weekly indexes. It was pro ra 1.ymdexes, wl 1 J iust had not heard ahol\t It.developed many years ago, am . l·· . 1 nd new lows

Some analysts also use indexes of new hlg rs a kl·· l'" . 1 ·t I· sec or hear of a ,vec' y mr ex

b t Iwrit(>tlm JlflVeye o see . J 1u as . ' , I lik the onf) ( e-v hi 11samI 11ew lows exact y Ie'of net nev . g . ' 1 .1 of anyone other than my-veloped. To date, I IlHlVCll~ lean anner which consistentlyself llsing tlwse inc exes 111am·, 1 .11 . Is. . 11 . 1 1 aJJ( se sIgn a ..1 nthem'llwa v precIse )n\ ( . 1pr;(;~::~~:~lthat when'the ;\(1vanc'e an:1 nec1in~t l:.(~~~(t;~~1 NIl-NT Tndex hoth advanced COIlSlslently, 1. 1 .

t }f)' k were rising nnc1 s }owmgan indicat.ion that ~os. t, stoc

1,.s. .' of a hun market.

1 1 h 1 i1HIlCatmg t ie presencestrengt 1, t wre) .' I' 1 the ;\ & 11 Index and the

It also seemed logIcal t la! W)(,11.' l' WOlllrl he anNH-NL 11Hlex hoth dceIine(l conslstP111~): It 1 1 .. ' .' st stocks were deel1Tlmg am s IOwmg)lJehcatlOn thnt mo. 1 r:p of a hear market.

k tl Nehy indicating t 18 presPll .. . < ,< . •

wea ness, 1, ~ " . flhA charts showed tllat the 1111-A carefl11 eX:l111mflt1Onor ' 1 . nt. . 1 1 A & D Index was t ie amon

ortant consideratIon wit I t le .... herehf I ich thE' weekly totals changed thell' (hrechon, t.. 6Jy -; 1. ' f rend. When I started a new A &indlCalmg a r:hange

0 t k l'fference whether I startp,dIndex chart, it did not rna e l111y(1 ' , f ~ 000 or a figure of

'1 Po f zero a figure () .J, cthe chart WIt 1 a llgure 0." . The e tent of5000 It (lid not matter what the totals were., . 18 ex .. " f di ction was the important thmg.the change 0 l~e'l _ 1 'th these indexes, I [onnd

During my ongma rescmc 1 WI

that they accurately identified the beginning and the end ofbull and bear markets in this manner:

The start of a,b!Jll m~~~,et~as signyled ....:~hen_q~~4dv~p._~~and Decline Index tt~~I_l~5L':Ipw~Es!J?y240.9_poLJ;ll§.,and theNH -NL Jndex registered at least 80 net new highs. The startof a bear market ~_~i1£1aled when the Advance and Decline!.n(l~x!~r.!led 5:l<?~~!:d by: 2400 UQj.I~ and the NH-NL In-dex registered at least 80 net new lows.

Examples of these trend change signals can be found inthe Chart Review chapter.

A quick look at the chart can show what is happening, butgrp,ater nccurncy is achieved by using the figures on the datasheet to pinpoint the 2400 point reversal of the A & D Index.

I could not believe that such a simple formula could applyto all types of markets, so I gathered the necessary statis-tical data to check hack for several years. I found that mysimple trend following method had indeed run into severalsmall losses dming rapidly changing trends in 1951 and 1953,However. the large profits that could be obtained by follow-ing that simple method would completely overshadow thesmall losses, and that simple method did not produce anylosses at all from 19,54 to 1964.

At that point I had achieved what I originally started outto do. I had dr'veloped an easy method for following stockmarket trends with reasonable accuracy, I had never heard ofanv method which could achieve a record of more than 75%accuracy, so T helieved that rate of accuracy was about allthat could reasonably be expected from any method.

I realized that absolute perfection was hardly possible, butI wanted to see if the method could be improved. I wantedthe signals to identify only the start of major trends, so Iwent to work on the problem of eliminating the Signals whichwere followed by minor trends.

6 DEVV.T.OPTN(; A l\lETJl()P ,'_

4 '. , li7(~that mv simple trpnd [0110\\At thai tilllP T d1(l not lPa 1" 1 ,m'D Ill(' [ol1lH1ation on

11 It" ate v weo ,.ing method won ( II rrn: '', 1,t theory of stock marketwhich 1 constrndf'd a comP1f' C •a complete unrler-

1 which hroug It to me,· ktrends-a t )pmy . t f the stock mar d.standing of the complex rnOVPll1ens 0

CHAPTER 7

YIELD

In my efforts to improve my method of trend determina-tion, I spent many hams analyzing basic facts and ideas. Iwas engaged in a pursuit of truth and logic.

My preference h::Jd always been for technical analysis of(he stock market, because technical methods provide theelement of precise timing. Now, however, I had to accept theidea that it was prohahly not possible for an)' purely techni-cal method to avoid the small losses caused by the marketmoving lip and down indecisively without establishing adefinite trend.

Then the thought occurred that it might be possible tocombine a fundamental approach with the technical methodwhich I had developed, A fundamental approach might givethA general condition of the market, and the technicalmethod could providf' t11f'exact timing. It sounded logical,Imt what fundamental consideration should be used?

The idea which provided the answer came to me far outat sea when I was cruising in the Bahama Islands. I wassailing in an area called the Tongue of the Ocean, where thewater was ten thousand feet deep, and there was no land insight. There was nothing out there but the sea and the sky-and the flying fish.

I had been watching the flying fish for several hours asthey played around the hoat. I noticed that, when the)' broke

47

8 ~nn4 , tl ov flew only about I1fty feet,out of the ',vater,' SOInPtlInPrS1

1, f'r as t\VO hundred fC'C't., r res thp.y ('was a . ,while at at 10f In, "I edllnab1e 10 get hig H'rRegardless of the distanC'l,\ I H'Yseem

1 ' f 1T feet above the water. ,than I iree or 01 1 1 t'f 1 C'n~nlllrC'swere tncapn-1 rhnt sue 1 ieau lUIt was a S lame ". I it 1 III T T wondered whv a

f 1 ' higher a 111me,e) , ihIe 0, reac llng aI' 11 to flv as' high as a bird. T leyflying fish should not le a 1 e l' f anl\ril)T, C01J1d it he

1 1 1 'pet to the same aw 0 M' 1 'were lot 1 SII1) ',' I' . , ilar altitudes hf'cause of I Jell'11 at rf"1Cl sum a "that they Call ( n ," . 1 f ravitv? 'Vas their clifTcr-differf'nt relationshIp to, the aw ° gIl T their diffC'rf'nt capa-

1, t gravlt)T goveme( ,\ent relations lip ° , ' , 'bilities?, Ilvi n 1 ,"rmillC'cl a maximum alti-

1 '1'1 f a vmg us 1 p" 1The capfl J1 I )' 0. .' 'he' ca ' ahilit T of a sea gull mig 11Inde of three or four feet. l' 1', P 1 fc~t 111e capability of

1 ' 1 t of severa 1lOU sam ,.", I' fpermit a wIg'. " " c 't a maximum altitur e athe highest f1ymg all'p1ane perm I s ,

more than 100,000 feet. "1 ' atter of relnUvity. 'Maxi-, ist 1/1 say t s a III ' 'The sC'wntls WOII . c , ' , 1 '1'1 ", 1 ' ' 1 hv relal1ve capa 11 I y.

mum height IS cetennmec .1' hout the capability of theWell thC'n, I thought, " la~ la 1,." it onhow high the

? Tl 'certam y a 11111stock market iere IS " limit there wouldk l)pcause if there were no , l' 1

mar et can go "", ,I l' it on maximum fl tltm e,he no hear markets. wu 1011~a 1m, r ~11rhe time ''l"ith-1 ' t k market would conlll1ue gOIng np c -the s oc

, 'nlelTllIltions 1out ~l1Ym~Jnr 1 . , ,.., t lies J had noticer a, 1 II t e:nl!pr III my s U( .,I rornorn )('re( 'l::l.' . , , IT. t on the maxi-. , 1 1 I havo a. l11n1lmg e ecfactor whl(' 1 seemec Ok Tl t Factor was yield. I recallNlmum height nf hllll11l~r ets'

lia 11k In rise'high enough to

that h1111markets ha(l never l1f'f>n..,~ T h:,rl' nover heflrc1 of rt1 . ,11 much less t ian .)n. ' " . , 11

Proc llee a )l]e c, ,'" , l' 1 all to IJrO(lu('f>a YlC (1 ' 1 1 1 gOllP lIg' enoug .1)1111 rnarlwt W nc 1 lac 'I Lf t which c1etAnnined thef 21Lot rvhvhe )Tielc1was the ac or .'o '?-I(J•. (~,

capahility of the stock market. 1 iC'lc1is an importantI h:'1(1known for many years t iat y

YIELD 49Iundamontal measurement of basic Investment values. Youprohah1y have a good understanding of yield already, butjust to be sure, Jet us define what yield is. Simply stated,yield is the percentage of net income realized from aninvestment or a savings account.

If yOIl have a savings account in a bank, the annual inter-est rate paid on yonr savings is the yield on your capital inthat account.

The dividends paid on a stock during one year is the yieldon the market price of that stock. Stock prices and dividendsare always changing, so the yields are also in a constant stateof change as the market moves up or down,

If a slock sells for $100, a share, and the yearly dividendsamount to $5.00 a share, the yield is 5%. If that same stockrises in price 10 $200, a share, and the yearly dividends in-crease to $6.00 a share, the yield has declined to ,3%, Ob-vions1y, as far as dividend income is concerned, the stockwas a better vn 1118at $100. a share than at $200. a share.

The ohtaining of dividend income is the most fundamentalreason for many people to invest their savings in the stockmarket.

For many years, yields have been calculated and pub-lished for the more important stock averages such as theDow-Jones Inrlustrin] Average, Standard and POOl'S and otheraverages. In my research, T used the yield on the DJIA, for.that average is the most widely known and followed,

An examination of vield charts showed that yields decrease, .

as a 1mn market moves upward, and that yields increase asa hear market moves downward. Generally speaking, yieldsare low at tbe top of bull markets, and higher at the bottomof hear markets,

_~._ca~~fl~!__~_tu~l.LC?LJongterm yield charts sh9wed that,~_Uling the Ja~t 19. Y~~~,_~,_!!13jorbJ111mi!!"ket~2p._.h~sL~ElY<::!".~~curred before.th,e yi(;l1.g.)!a..5!declined to less than 4%. Dur-

YIELD

ing four of the six huH markets during that 40 year period,the yield declined to Iess than 3% at some time during thehuH market, before the top was reached. Following is a tabu-lation of fhe lowe~t yield reached during those six hullmnrkets.

51

Dnte ofLowe~t Yield

jan., 1929June, 1936June, 1946Scpt., 19.55Aug., 19,59Nov., 1961

Lowe~tYield2.88%2.80.'3.2,'~3.912.922.97

When Lowe~t Yield- Was Reached------9 months before the top

9 months before the topRight at the top22 weeks before the topRight at the topOne week before the top

As 1 write this, the lowest yield reached so far during theseventh bull market, was :3.09% in January, 1964.

I11~_J()West]ie!d.._.t.:~a~h~5.L.Q~.fQ!.~!~nortQQ.Q.[ 1953_!Y!!§1·~5%.T}~~refore, I lJaV:~~~Y~_~sidered that.J2.2j!!UQJla~E.~e.rl.a_~~JI!,!.a~~,:_u.?p,and 1 have never considered the de-cline of 195,'3as a hear market, because no buJJ market duringthe last 40 years had ever made a top until the yield haddeclined to less than 4%.

An examination of the yield chaIt shows a yield of less than:3% in 1934. Aftpr the yipld declined to less than 3% in 19.14,the market experienced onlX a moderate price decline forseven months. '['hen it started on a second stage and wentinto a strong up trend which lasted more than two years.Thp seven month decline turned out to be only an interrup_tiOll hetween the two parts of a multi-stage bull market. Thatwas the only case T found where a yield of less tl1an 3% didnot indicate the proximity of a bull market top.

FOllowing is a tabulation of yields which occurred at bearmarket bottoms.

YTF.LD52-

YieldDate

JI11y~--1932March, 193RApril, ]942June, lU49NO/., Hl~7Oct., 1960June, 1962

woltld ohserve th[ll: yidels variml tr~-At first glance, one . k t hottoms. However, it

1 l'fferent lw:u mar e. .mendously at t 18 (1· , H)!)7 all the bottoms w;re nccorn-

1<1he seen that, hefon~ , .' 1~S7 Y1c1<lsat thecon. ". f 7% or more. Startmg m .' "panied by ywhls 0 ' . . . g demand for stocks,

. ll l' licntmg a nsm· f 'bottoms dec mer , m<· . 1. 1 f 'om increasing fear o m-1 1 <1resu tee r .

The incrPHse< r pma~, n ft' as wpll as an irl8rensmgI ·1 r nmetepll .lIes, , . t'tflatten sinpf' t H'~pal ) .. t f nds and other J1lSI u-

c 1 f 1 rptlremen.n " f.number of mutua .unr s, .k t Institntional investors r:

. . the mat e. .. 'f kInO'tional Investors In ' 1 'tl the intentIOn 0 eep .:->1 . 1 de stoc {S WI 1 » '1 11 p_quentlv [mv llg 1 gra .. , h ' re<111cesthe nvat ale su .. . . S e actton ~' It

them for a long nrne. L 11, '1, and incrensed demand resu11 of storks. Redl1ced SUP1?)

P ) , I1mver )'JClds. 1 ionsin higher pnccs anr ":", 11 imllortant cone I1Sl0f 1 1 of VIe ( someFrom a C<lrel1 stuc y " ' ,

C0111dhe re<lched: t f' . . 1 l'emen 01 genera me<lSll· ..

11 ,des a gOOf .. , • t'1 Yield nsun y prO' I. '1 d alone as a pref'lse im-.,' . 1 t r-an not 1e use •mnrket values, HI. .. 11'. f 1 1i110' and se mg. , 1 f re' g device or 111) h 1 4~ I some tirne ie 0,m 1 edtolesst1an ,oa ..

2 TIle yield has <ropp . . 1 .' g the last 40 years.. 1 11market c UlIn t dthe top of every)\1 "1 arket h<ld never star e. 1 t 40 years a lear m3 Durin<1 the as . . ,

. . h. 11 ~% or more. fwhen t lw )'1Pr was ri 1 "kl)' vield figmes,or

se on y we".. . t4 It is important to 11-~, gh \0 produce accura e, . 11' 11s are not preCIse enoumont 1 y yJe ( .

results.

10.3R%7.757. SO7.465.30a.so4.35

YIELD 5,313e£oroTstarted my careful study of yield, Thad expected it

to he an important factor for measuring the capability of thestock market to reach its maximum height. I found that to betrue, but only in a general way which was not precise enoughto snit me.

Thad started with the idea that a 3% yield would indicatea good time to sell, but I had to abandon that idea,

Although a yield of 3% or less has frequently marked theproximity of a hull market top, one could not say that a 3%yield would accurately indicate the top of every bull market.There have been times when hull markets continued moving"P for a long time after a .'3%yield was reached. There havealso been times when bull markets have ended without theyield declining as low as 3%.

'Ve must be careful to avoid interpreting statistics in amanner that will confirm a pre-conceived idea. When thefacts show that an idea is not sound, that idea must be dis-carded. If a person refuses to recognize the truth, he can notdevelop a plan of action to deal with the awful truths he wiIIhe confronted with in the future.

I was rather surprised to find the most important thing Ilearned about yield was that it seemed to be the factor whichlimited the ability of the stock market to start a major de-cline. The limit worked in a precise manner. My research in-(Heated that a hear market had never been able to get startedwhen the yield was more than 5%. I could not find any ex-ceptions to that oh~flrvation, so it seemed that a yield over 5%would not permit the start of a bear market.

As a result of my study of yield, I added one simple rule tothe operation of my method. I made a rule that there couldhe no sell signal un'less the yield on the Dow-Jones IndustrialAverage>,was less than ,S%at the time of the signal. 111at onesimple rule pnt my method of technical timing under thecontrol of the most basic factor of fundamental value.

YIF.T,n54

To find out how well rho improved lllelhod llad ,,,or1<edpreviously, I deciclc{1 to gather the statistical data necessafYto exlfmd 'he indexes hack in time [nr a period of 15 Of 20years. ThaI was a hrger project than T expeete(l. Tn ohta~nthe necessary infofmation, I hncl tn spend many long hours 111

lihraries, sp,;rching through old newspalwrs and microfilm

copies.When I had completed r;athering research data hack to1942, I checke(1 my improved method during those y(,~HS.1found that, with the improved method, there were no whip-saws at all, and no losses, going all Ill(' way hack 10 1942.Every huy sign,ll and p,very sp,]l signal resulted in a profit,whel~ usi;'g the now-Jones Industrial Average ::IS n trading

medium.Here was something difficult to helicve. 1 had dew'loper] amethod which proven to he 100% accllrale dming the twenty-two vear period from 1942 to ]964. It W::IS so simple that any-one 'could easily lise the method, and only three minntes aweek were reql'lired to do the ca1cuhtious and charting.

1 fdt like 1 had made an important discovery. 1 had learnedhow to interpret the stock market law of gravity.

CHAPTER 8

CONTRARY ACTION

M)' improved method satisfied me for quite a while. I feltthat was abont as far as I con1d go in developing an accuratemethod for following the trends of the stock market. Butnfter a while, subconscious thoughts began haunting me-thoughts that something more could be added to improve themethod. I. soon solidified those fleeting thoughts into a solidquestion. "What about tops and bottoms?"

The thought of trying to find a way to identify the exacttops and bottoms of hull and bear markets was almost toomuch to contemplate. All the hooks I had ever read about thestock market said it was impossible, and I agreed with them.

Trying to identify the exact tops and bottoms would belike reaching for the moon. But hold on, just a minute. Isn't~hat exactly w.hat am government is now planning and work-Ill,!! on-reachmg for the moon? We have already sent menand rockets Iar ant into space. Such things were thought tohI' impossible [nst a few years ago.

I remember, about twenty years ago, my friends thought Iwas slightly crazy when 1 told them I expected to see rocketsheading for other planets within my lifetime.: Twenty yearsago, there were only a few of us who believed that men could.leave this planet on rocket ships. Now it is an accomplishedfact.

So T started on my own space project-trying to locate the

55

CONTnllTW ACTION

top space and the bottom space in 111111and heRr markets.I wished T had an oleotronic computer to help me, hut then

I realized that man is eqnipped with something better than aoornputer-va hrain which (sometimes) is capable of logicalthought. That hrnin pr()(llwcs conscious thought, l1nd evenworks snhconscionsly while' we sleep. Consciously, suhcon-sciously and unconsctouslyit took me qtrite a while to pro-duce some logical r-onclusions on tops and hottnrns.

I reasoned that one might pick the top or hottorn by somemanner of contrarv action comhined with a method of timingthat action. The onntrnry aol ion would he [ust the opposite ofwhat the majority of people think the market will do nt thetop 01' bottom, for the mnjority is usually wrong at the topand the bottom.

Right near the hottom of a hear rnarkot, the majority ofpeople US11a11)'holievo that prices will (le'c1i~eFurther. If ~heydid not helieve it, they would not he seJJmg at that time.Right near the top of a hl111market, th; majority of ~f'opleusually lwlieve that the ma rket will go hll~her. Tf they (hd notthink so, they would not he lmying at that time.

TIlE MAJOnITY IS USUALLY WnONG

At first it may he (limeu1t to accept sllch a stHtement as fact.So let us pursue the suhject a hit. Let 11':start hy d.ivid!ng thepoplllatioll of this planet into two gronps, the minoritv andthe majority. .

It is not especially pleasant to mntf'mpbte that ~he n~aJor-ity of people on this planet are not the most mtel~lg:ntgroup. The minority m11St be smarter than the mUJ?f1ty.Why? BeCflllse the majority are poor folks who am not 111ghlyedll'cated and must work hard to make a meager living. Manyof the majority are so poor that they are actllfilly stHrving.Thl' minority 'is comparatively wealthy and has figmed out

CONTRARY ACTION 57wavs to make n good living with less work. So the minoritymust be smarter than the majority.

In almost any country, you would find that a large percent-age of that country's wealth is controlled by only a small per-centage of the people. A study titled "Characteristics ofStock Ownership" was recently published by the Universityof Pennsylvania's Wharton School. The report said that al-most 50% of all the stocks held by individuals in the UnitedStates were owned by approximately 1% of the Americantaxpayers. .

lLwould seemthaLonly :,!2)_l~!l.9rtty_~.!~..~.Jleople on this[Jla~~Lh~v~_Q1e?:hilgy and ambition to ~~~dy..llUrd, to iig~!!~?t~t ways to accuJl1~II~t.e..\y.~~Lth..~El..lqlaise their standard of,!!ying. l1~_!!!.ajqr!.tY,_a..~~_.~pparent!yunable or unwilling..,!2~cqlTi~~_~1.~_~12£~I~~g~and take the action which 'Y0uld en-able them to do the same.'7'An~tj;~~dim~t~jty-~rtE~ majority is the herd instinct whichthey follow. Tho desire to go along with a large group is evi-dent among people and animals. This is caused by the ideathat there is safety in numbers-an idea which has persistedsince the primitive days of civilization. In modern life, peoplefecI tIlere is safety in conformity-to think and act like themajority of other people. Anyone who dares to be differentfrom the crowd is not considered to be "normal."

One of the big troubles with modern society is the con-formity of ideas nml action. I call it the mediocrity of con-formity. Many people are actually afraid to be different-topursue unusual ideas. Rut the road to success is paved withunusual ideas, and traveled by unusual people who dare tobe different. In om modem society it frequently pays to beunusual and different.

Another trouble with the majority is that they have a ten-dency to believe what they are told, especially if something

CONTHAHY ACTIONCONTRARY ACTION 59

Almost everybody tries to form an opinion of the market.Many investors are constantly gathering information to helpthem form the correct opinion. As the opinion forms, the in-ves~or subconsciously becomes more receptive to the ideaswhich help to suhstantiate his opinion.

There are always plenty of arguments for both sides of ac~se. Since the equal acceptance of arguments from bothSIdes would result in frustrating confusion, a person mustchoose which to accept. Frequently a person accepts thearguments which support his own opinion, and he ignoresthe opposite side of the case. It is human nature to do so.Many pe~ple actively consider and publicize only the argu-ments which will support their opinions. The process is calledrationalization.

The majority seem to have an uncanny ability to buy nearthe top of a hull market, and sell near thebottomof a'.bearmarket. Apparently that is the way things must be, otherwisewho would the minority sell their stocks to near the top-andwho would they buy stocks from near the bottom?. ~ne should try to think and actlike the minority, for thereIS httle hope for the success of the majority. There is notenough room at the top for the majority.. .

Realizing that the majority is usually wrong in their actionnear the tops of hull markets and the bottoms of hear mar-kets, I looked for ways to recognize majority action at thosepoints. I also looked for a way of timing the contrary actionto he t~k(m at those poiT~ts. It would not be enough just torecogn~ze when the majority was wrong. One must alsorecogmze exactly when the majority is wrong enough to takecontrary action. .

is rcreal(~d Frequently- The majority find it is easier to :1cceptthe statements of others than to think for themselves.

The minority, who (10 not believe what they are told, mustput forth inte~sive effort in their search for tl~uth and lmowl-edze. Sometimes tho qnest for knowledae is like sailing on an111l~IJartcdsen with nothing to guide YO~lexcept the Facts yonlearn as you go along. The success of your voyage dependson how well yon can separate facts from fantasy, how wellYOllcan analyze the facts you discover, nml how wdl you lisethem to reach the right conclusions.

In tho stock market, the majority nrc inclined to believewhat they are told in the form of tips, rumors and advice.The minority helieve only what they know to he facts. andthen reach their own conclusions hy analyzing those facts.

Still another weaknE'ss of the majority is their dishelid inchange. 1\,10stpeople do not expect or prepare for Ch:1l1gE'Sinthe status quo They believe that things will contitl11e indeli-nitely just as they are right now. When Ihp. stock markPt gOE'Sup, the majority expect it to continlle going lip indefinitE'ly.1118Ydo not bolher to think about the lime when the marketwill chango its course and tum downward.

At tho same time, the minority know that change is inevi-table, and they are looking nhend, trying to figllrp. how to tellwhen the m;rkPt makes the change, and planning wlrataction they will take at lhat time. Tlw minority know thatevery 111111market has been Iollowcd hy a hear market, nndthat every hear market hns heen followed hy a hull market.The slJ{'cessf1l1investor rnust possess a mind whif'11 is Aexihlflenough to accept changing conditions. .

The m::ljority of investors are almost paralyzed by theH~opinions, l)eca~lse it is diffienlt to change an opinion which iswell estahlished. 'V11en a person has a definite opinion, thereis the danger that he might not he ahle to change it untiltoo late to 'take the proper action.

60 CONTRARY Ar:TION

TIm nOl~rnJ-.f BUY SICNAL

Careful studies of my charts reveakd a remarkahle phe-nomenon of majority action which frequently occurred ~learthe bottom of hear markets. It is called a "selling climax."When a bear marl<et declines so far that people really getfrightened, a strange quirk of mass psychology causes manypeople to decide, at the same time, that they have hadenough of the hear market. They want to get out before they

lose everything.When sOmany people sell out at the same time, their com-

bined action creates a selling climax. During the selling cli-max, prices decline drastically on tremendous volume-usually the largest volume in yeflrs. The market also shows itsgn~atest technical weakness at that time.

Th~.§elling climax does not usually mark the exact bottom?La_b_earmarket. The lowest point inthe hear mar~et!s usu-~!y_~11~~~.2~Jour weeks after the selling climax. The lo\",.,?§{p_0.~~.i~usually ..a_c?l)~p.al:!~1 )X}~()~~.VOl11lTleof !rading.

The best way I found to identify the selling climax was bythe number of weekly net new lows. It was usually identifie<!12)'-.1.'50 or more net new lows during that week. When 750or more net new lows occurred during a wpck. I called it the"first climax weel ." Sometimes there were much mom than

750 new lows.To accurately and consistently pick the lwst time to buy, I

made a r111cto buy at the start of the fourth week after thefirst climax wcek,' If, before the start of the Fourth week,there was a week in which more new lows were marle than inthe first climax week, T would cancel the C011ntfrom the firstclimax week. Then the time to buy w0111<1he at the start ofthe fonrth week nfter the wef'k which hnd the greatest nnm-bel' of net new lows. I called this the Bntlmll Buy Signfll.

CONTRARY ACTION (h

A good example of changing climax weeks occurred nearthe bottom in 19G2. On the last week in May, 1962 therewere ROO net new lows. The following week (the first week inJllne) there were], 141 net new lows, The Bottom Buy Sig-nnl rule called for buying at the start of the fourth week aft~rthe climax week of ],141 new lows.

T~le Bottom .Buy Signal did not mark the bottom of everyhp'n! market since 1942 because some hear markets neverhave a selling olirnax. There were Bottom Buy Signals on thefollowing dates: c.

Oct. 14, 1946May 19, 1947Nov. 25, 1957June 25, 1962

The bottom signnls of 1946 and 1947 marked two of the[our hottoms in the three year bear market which lasted from1946 to 1949.

The bottom signals occurred near the bottom of three out'of the five bear markets which took place during the twenty-two year period between ]942 and 1964.

There was no Bottom Buy Signal in 1960 because therewas 110 selling climax in that hear market. Since there was noselling climax, and the highest yield reached during that bearmarket was only 3.80%, it would seem like that bear marketshol1ld have gone lower.

That 1960 hear market came to a sudden end right afterthe election of President John F, Kennedy. Perhaps the re-snlts of that election contributed to the premature end. ofthat hear market. .

My research has shown that the following conditions arefrequently found at major hear market bottoms:

62 CONTHAHV ACTTON

1. There is low volume of trading, and them is Iitt lo interestin huying or selling stocks.

2. There is alack of puhlic pnrtlctpatiou in the stock market.The plThlie is discouraged and apathetic toward the mar-ket lwc:111seof large losses experknced in the drastic de-cline from the previous hull market high.

3. There is widespread puhlicatioll of a pessimistic economicolltlook, and then' is lTsllnlly much talk of a recession neara major bottom.

4. Then' is a lack of new stock issues. Ver)' few new issuesare ofTen~dto the puhlic during a lwnr market hecause no-body wants to buy them. There is no mlthllsiasm for suchhigh risk ventures.

5. There are many bankruptcies n~sulting from too mnnycompnnies expanding too rapidly during the previousboom. There is too much competition.

6. Many well known promoters and "financial wizards" en-counter difficulties. Some of their corporate empires crum-hIe, and some of them even leave the country.

THE TOP SELL SIGNAL

My search for a way to identify tllA top of a hull marketwas more difficult. There is usually some evidence to Indicatewhen a top is near, l)11tit is extremely dirnclllt to consistentlyidentify tlw exaet top. On« reason for thn <limenlty is that topareas frcqllf'ntly consist of large rallif's and declines whichmay sometimes occupy a time period of six months or more.

My efforts to solve that problem required many months ofdeep thought and hasic analysis of cX~H'llywhat happens atthe top of a hull market. There were times when T thought Iwas being too presumptuous in hoping 10 achievA what thevast majority of people thmTght was impossihle. But then Ithought, "Is not the majority llsually wrong?"

63A careful research showed that the following conditions

frequently were fmmd at the tops of major bull markets:

1. When the market reaches a top area, the bull market hasusually been in progress for a year or more.

2. The yield on the DJIA has reached a level of less than 4%at some time during the bull market. During the last 40years, .there has never been a major top with~Jtlt the yielddropplTlg to less than 4%.

3. Sometimes there is divergence between the action of theDJIA and the Advance and Decline Index. Divergence oc-c,urs wh:-Il the DJIA goes to new highs on successive ral-lies, while the A & D Index fails to make new highs onthose sam.e rallies. Such action shows that the majority ofp~ople thlJlk. tl~e stock market is strong and making newJughs, when It IS actually weakening.

4. There are fewer new highs than during the earlier part ofthe bull market. l11e greatest number of new highs are~ad~ ~vhen the market makes its most powerful upthrust.

5. 1 her e ISless volume at the top than during the earlier part·of the hull market. The greatest volume usually occurs atabout the same time as the greatest number of new highsare made.

6. ~ew issue fever grips speculators. Sometimes new stockI~SlTe:are sold 011tso fast it is difficult to get all one orders.For mstance, a speculator may read about a wonderfulnew company planning to subdivide and sell lots on theplanet Mars. He may ask his broker to buy 500 shares ofInterplanetary Land Corp. when it is offered to the public.A few days hltcr the hroker might say, "Sorry, there wasso mU?h demand for that issue we could only get 200shares. Some of those new stock issues have doubled inprice within II few days or weeks after the public offering

7. There is talk of II new era such as the "roaring twenties":

CONTRARY ACTION

CONTIlARY ACTION

tllA "soaring sixties", "a new plateau of permanent pros-

perity."8. There is large puhlic participation in the stock market. A

tremendous number of small investors gf't into the market-right near the top.

9. There is genf'ral enthusiasm and confidence in the [uture.

The couditions found at the top are general in their nature.They provide nnrortant gtlidance in identifying a top area,hut they do not indicate the exact time when the marketshould reach its highest point. The prohlem was to (levelop aprecise method which would consistently identify the top,and also provide accurate timing for selling as near as pos-sible to the very top.

The kev to the solution occurred to me one day while I wasthinking 'ahollt how my hrother and J h:1(l freg'ucntly deter-mined our exact position fit sea while we were cruising alougthe coast of Mexico in om sailing yacht the "Callnnt Lady".

Quite often we calculated our position hy taking compasshearings on two or three mountain J)f)aks. I would hold thecompass in my hands and call off the hearings as I sight()dacross it at the mountain tops. My hrother would write downthe bearings and calclllate om POSitiOll in relation to thosemoutain peaks, which were showll 011rmr c11arts.

The rnr-ruorv of cnlclllating our position in relatio» to themountain peaks on the llf1l1tical charts caused me to look fitmv stock market charts a little diffpfPlltly. I noticed thatsdmetimes in the top aff'as of bllll m:ukp\s, there were threeor f01Jf distinctive peaks on the Advflnee and Decline Index.The third peak "vas llsnall)' the higl1est point in a bull m:lrket.

There were other peaks near the top nlso, but I [orrnd awav to identify the right peaks.

+he correct-location of the peaks was shown when the A &D Index had a failure. By a Iailure, I mean th:lt the A & D

CONTRARY ACTION 65Index made a lower low on the chart. To understand the fail-ure situation, one should realize that, near the top of a bullmarke:, the A & D Index moves upward in a zig zag patternof rallies and declines. The failure occurs when the indexline, in a downward movement, goes below the lowest pointof the last previous decline.

EXAMPLE:

3rdPEAK

.A. & D INDEX

The first peak is the highest point reached by the A & DIndex before the Failure,

The second peak is the top of the next rally.The signal is completed, and the time to sell is when the

A & D Index has declined for two weeks and at least 300points from the top of the third peak.

J call this the Top Sell Signal.In the zig zag movements of the A & D Index, a rally or

decline must consist of at least two weeks movement in thesame direction, although the two weeks do not have to beconsecutive. A one week movement can not be considered as

66 CONTnA HY ACTION

a rallv or n (lPdinf'. A one wp('k movernont is only an inter-ruption in a ra l1y or a dp<:'1ine.

EXAMPLE:

ONE "WEEKMOVEMENT

\

TH:IS IS NOTA FAIIlJRE

THIS JSA FAILURE

TH:IS :ISA FAILURE

To form the third Iwnk, Ihp A & D In<1f'xmust ndvanoe forat least thrf'f' weeks.

There can he no Top s-n Signnl unless the yi~ld on ~hpDITA has rP:1rhed n level of less than 4% n~ some lime dm:11lgthe bull market. In the pnst, WIH'1l a Inilure has oecmrpdwith a highrr yield, it has no! 11<1<1. ;111Ysigllfkan~e. . .

Volume must hf' 10wN on the tlllnllwa k Ihan lt was em herin the hull market. The Top Sell Signal must also he. con-finned hy the New High-New Low Index registf'rillg [ewernew hiP.:(l<;than enrlier during the hull market,

The 1")1111 market shonhllw under way for nt least one yenrbefore the Top Sell Sif(nal occurs,

In the pnsl it has trd,en the A & D Index from 19 to 29vleeks to travel from the top of the first pea k to the top of thethird peak.

Tho Top Sell Signnl did not mark tl1P top of pvpr? hullmarket since 1942 because the failure and three peak forma-tion did not appe::lr at every top.

CONTRARY ACTION

There were Top Sell Signals on the following dates:

April 8, 1956August 16, 1959December 24, 1961

The Top Sell Signals occurred near the top of three out ofthe four hull markets which ended during the twenty-twoyear period between 1942 and 1964. When top and bottomSignals (lid not occur, the market direction was accuratelyindicated hy the trend signals.

Trying to pick the exact top and bottom is like reachingfor the brass ring on a merry-go-round. One can not expectto catch it pvery time around. But if one could pick the topand bottom at Ipnst half of the time, he would have a tre-mendous advantage over the majority of investors.

~Te must understand that there is no physical law whichsays the third peak must always he the exact top of a bullmarket. There is no law which says that the fourth week aftera selling climax must always be the exact bottom of a bearmarket.

1110se indicators are the ones which have been the mostaccurate in the past, and therefore should be used to deter-mine approximately the best time for action. We shouldalways try for pinpoint Rccurflcy, but sometimes we must besatisfied with something less.

To pick tho top and bottom, one must religiously followmathematically precise methods. One must not give any con-sideration to optimistic or pessimistic opinions voiced byothers. nor should one form an opinion of the market. If youfonn an opinion, yom subconscious pride will make it diffi-cult to change your opinion-especially if you have men-tioned it to others.

I have developed the attitude that anybody's opinion, in-

68 com'nAlW ACTI.ON

cllHling my own, is only guesswork r always try to a~fonning an opinion of thp. market, for the tme state of;market- can he determined consistently only by factsopinions. I found that I achieved greater accuracy bycompiling and annlyzing facts in a scientifically cons,manner.

If )'OU want to evaluate opinions, read the second lasof the Wall Street Journal. Under the title "Marketare published the opinions of the professional expertswho rnake a career of ana lyzing the stock market. Almosday YOlI will find cnnnicting opinions offered by the eXESome say the market should go up-others say the mshould go down.

Everyone of those experts is extremely intelligent, eencerl and oonsr-ientions. But somehodv must he wroshould make )'011 stop anr] think.

\VIH'n Tcompleted my work on tops and bottoms, I rethat I Imd accomplished much more than I had thougpossible'. I had started to rh~Vf']npa method of followingmarket trends, but I harl pnded up with a group of meand Facts which blended nicely to form a completelyand diffenmt theory of stock market- analysis.

The theory was hased on logical concepts and actualof haliitual stock market behavior. There seemed tochance of misinterpretnt.ion, for every Imy and sell sign .clearly nnd precisely defined. The lheory was amaZing!'curate in its operation. T had never seen or heard of anythat could match its sirnpllcity and ar'curacy. . .

Although some of the ideas in the theory are oomplway in which huy and sen signals develop is simplogical.

;:rhere were so many different factors in the theory:was nnahle to think of a descriptive name for it. It w,

CONTRARY ACTION 69W •• Yd on which I hnd worked for years, so I gave it my

arne. I called it the Haller Theory.~xt chapter will be devoted to a precise deRnWon of~r Theory, its concepts, and the rules which produce:~~11Signals.

CHAPTER 9

THE TIAI,I,ER TflEORY

The IInller Theory is an unusual com hination of three dif-ferent approaches to stock market analysis:

1. Fllndmnent:ll investnH'nt values2. Technical trends3. Contrary action

FII11(!olllrmtal inlwstmenJ values are dcl(~rmined by mens-lIring tlU' wf'ckly yidd on the Dow-~onf's Tndustri:ll Averageof 80 stocks. Yield nnnlysis is the snnplest way to measure[nnrlnmenral va luns. It is an important [ar-lor in detpmliningwhether the market is in an area which is safe from decline,or in an area which is dnngerolls and vulnerable to an im-portant df'cline. Tlw market can not stnrt a mnj;r decli~leunless the yield is low enongh to discomage lmymg by m-veslors.

The yield must 1)(' l('ss than 5% for a Tlc]](l S~'l1Signal to.occur, for no impnrl:lllt dpl'lil1f' hfls started, dnnng t.lw past40 years, when the yield W:lS 5% or more. After the yIeld hasde~lincd to less than 4'7;', a Top Sell Signal can occur. 'Vllf'~1the yield declines to l('ss than 3%, a major hear market 1S

11sn~lIv110tfar away.Te('.·',niral trend eval1lation is obtained by charting weekly

advances and declines, and weekly new highs and new lows.These technical indkntors are important in recognizing the

7°

THE HALLER THEORY 71

internal strength or weakness of the entire slock market.'When there are more stocks consistently advancing thanthere are declining, and there are more stocks making newhighs than new lows, the trend of the market must be upward.

For the market to establish a down trend, the number ofdeclining stocks must consistently outnumber the advancingstocks, and there must be more new lows than new highs.These two indicators show the technical action of all stockstraded on the New York Stock Exchange.

Couiraru action is cnlled for when panic selling in a bearmarket is so intense that it produces a selling climax. Theselling climax can usually be identified by the number ofstocks making new lows for the year. Contrary action is alsocalled {or in a hull market when certain fundamental andtechnical action indicates that the majority of investors arewrong in their opinion of the stock market.

.These three approaches are combined into a workingtheory which consistently produces mathematically precisehuy and sell signals.

There are Four different signals produced by following therules of the Haller Theory:

1. Trend Bny Signal2. Trend Scll Signal~. Bottom Buy Signal4. Top Sell Signal

The Treml Bny Sigllnls and Trend Sell Signals are \1.''0(1 tofollow the basic trend of the stock market. They occur whenthe trend of the market turns up, and again when the trendturns down. These trend signals have marked every majortrend change during tl10.22 year period from 1942 to 1964.During that period, no major trend has started without beingidentified by a Haller Theory trend signal.

The Top Sell Signals and Bottom Buy Signals are based on

72

TIfF. HALLER nJEOnY

contrary action, and are clpsigned to im}jeate a huy spol asnear as' possible to the hMtlJln of a bel1r miHket, amI a sellspot as nf'ar as possihle to the top of a hull markel. Thf' topand bottom signals do not always occur at pvery top andbottom, for wild panic selling does ~lOt~:lk~ pl~ef' at .everymarket hottom, and accurate techlllcal 111(1IcatlOnsme not

present at every top. 1 1When the top and hottnm signals e10not oeem,. t ie tr.enc

. I, '11' l' "t" ']1'" market direction and the time fOJ nc-SIgna S ,-\'J Inc Ie" c· I" ". •

tion. One should act on the signal which occurs first. Th.o sIg-nal which appears first and requires ar-liou, is A~l1ed~ pnmflrysignal. The signal which is second is a confirmlllg SIgnal, and

does not require action. " . 1In recent yems, easily identified top and hottom sIgna s

have oCA11fre~1very close to important stock mflrket tops ~n~l

b tt The Tal) Sen Signal of December, 19n1 was 0-o oms. ' , , l f A '1 19A2

lowed and confinnecl by the Treml Se11Signa 0 pn" .•1 •

Ri(rht near the very bottom of the 19A?, crash, there was a

bI:"' ti] 1 Bottom TIuy Signal in the last week of June, 1962.

eau 1 n " 1 J 19A3It was Aonflnnl"d h)' the Trend Buy Si~na in. annary,,). ,when t1ll>trend had definitely turned up. .

The Haller Theory was designed to identify only the majorbull and bear m~rk~ts. Minor trend ehnnges do not usuallyproduce a buy or sell signal.. . .

These are the rules for klentlfYlllg each slgn~l as it hap-

pens:

THEND BUY SIGNAL nULES

1. The wr-ekly Ae]vance and Decline J nrlex mus! turn upward

hy 2,'100,Pko1intNs.,II'O',ll New Low Inrlex must register 802. The wee v ew .lh·· ,-

or more net new high~.

TIlE HALLER THEORY 733. There can he no Trend Buy Signal until after there has

been a Trend Sell Signal.

THEND SELL SIGNAL RULES

1. The yield on the Dow-Jones Industrial Average must beless than .'5%at the time of the signal.

2. The weekly Advance and Decline Index must tum down-ward by 2400 points.

3. The weekly New High-New Low Index must register 80or more net new lows,

4. There can be no Trend Sell Signal unless there has pre-vionsly been a Trend Buy Signal. (A Trend Sell Signal cannot occur right after a Bottom Buy Signal.) Trend signalsshould follow each other in orderly, alternating fashionsuch as Trend Buy Signal, Trend Sell Signal, Trend BuySignal, Trend Sell Signal, etc.

The weekly yield is published every Monday in theWaUStreet Journal on the next to the last page. It can he foundunder the title "Dow-Jones Closing Averages". Weekly yieldfigures can also he found in Barron's Financial Weekly, nearthe rear, under the title "Market Laboratory". These financialnewspapers can he fonnd in many public libraries. It is notnecessary to keep a yield chart, hut you may do so, if youwish.

Weekly advances and declines, as well as weekly newhighs and new lows, can be found in Barron's and on theHnancial pages of many Sunday newspapers. Not all Sundaypapers carry this information, however.

If you compare different newspapers, you will find that theweekly figmes for the advances and declines and the newhighs and new lows are not the same in all the papers. Differ-ent papers seem to puhllsh slightly different figures. For the

THE HALT.EfI THEOTW74 . 1'1

T wnulr] place my Inifh in Bnrrou s, w llC,' 1greatest accuracy, " IIhas an excdlpnt' record of accuracy, and is the host wee c yfinancial puhlicnt ion in the United Stntes. , , " ,

'T'1 net melhod of calclllating and C'hnrtmg the" ()pkl)j ne ex.• " , ' 1 ' I I

advances and declines, and the weekly n~w llg lS nne nowlows has already hcen deserihcd in an enrller chapter.

BOTTOi\1 BUY SIGNAL HULES

When 750 or more net new lows are recorded in a week,1. that week is the first climax week. 1111)' at the start of the

fourth week nlter the first climax w()ek.. '2 If before the start of tllP fonrth week, there IS a week ~1I

, which rhere are mom net new lows than tllere were 1~

the first climax week, onncel the count from the first c1l-k Then huv at the start of the fourth week aftermnx wee .' ' • f 1

the week which has the greatest rmml ier 0 net new OW\3. If tlH're is no Bottom Buy Signal. buv at the next Trent

Buy Signal.

TOP SELL SIGNAL HUT,ES

The vield on tIl(' Dow-Jones Indllstrial Av~rage m~lstL I " 1n(l n level of less than 4% at some time dllr1nglave re::tch, " " .. ,

the hl111market. ,2. The hull market shrmld have been under way for a ) ear

or more. 1 f '13. The weekly A(lvnncp :11HlDecline In.lox rnusf 1:lV0 a :11·

4. 'The first ppak is tlw highest point r0:1dled by the A & D ,Index hefore the Failure. DThe second Denk is the top of the next rally of the A &.'

5. ' , '11• 1 I' of the A & D Index must consistIndex. A rat y 01 nee me I' ,

of at least two wpeks movement in the same r irection,

TIlE HAI,LER TIfEORY 75hut the two weeks do not have to he consecutive. A onewpek mOVPlmmt is not a rally or a decline.

6. Take no action on the rally approaching the second peak.It makes no dHfen~nce whether the second peak occurshefore or ::tfter the failure,

7. The A & D Index must rise for at least three weeks toform the third peak.

8. Sell when the A & D Index has declined for two weeksfrom the top of llw third peak. The A & D Index shouldalso decline at least 300 points below the lop of the thirdpeak. H is usually s:lfe to assume that the third peak hasmade a top when there has been a decline of two weeksand 300 points.

9. Weekly net new highs must be less on the fhird peakthan earlier in the bull market. On the third peak, theweekly net new highs should not be much more thanhalfas much as the gre;Itpst number of weekly net new highsrecorded earlier in the bull market.

10. Volume must be lowpr on the third peak than it was ear-lier in the hull market. A six week moving average ofweekly volume is the most precise way of measuringvolume in connection with this Top Sell Signal.

11. If there is no Top Sf'1l Signal, sell at the next Trend SeIISignal.

A IIhough there has never heen a false Top Sell Signa] dur-ing the lnsr twentv-rwo years, such an event is possible andshould he considf'red. It mi,ght he wise to have a method ofrerognizing such a false signal if it should occur.

It ~vollld probably hp safe to assume that a Top Sell SignalWasfalse if the sign::tl was followed hy the A & D Index risingto a new hull market high, at least 500 points above its high~est previous point.

Another indication of a false signal would occur if the sig-

o'0

*,.,g

~~

~8'0

~IE•..~ '""~ ~~

?~~~r ~

o'"

'".:1

THE HALLER THEORY 77nn] was fnllmved hy the NII-NL Index: rising to a new huHmarket high. Still another way of recognizing a false TopSoil Signal would he for the six week moving average of vol-lime to rise to a new hull market high, after the Top SellSigna! had occlIrred.

Here is a list qf the HnlIer Theory primm)' signals whichrequired action. There arc no conflnning Signals included inthis list.

Signal Date DJIA---~~-----------------Trend Ruy Signal September 19, 1942 107.50Trend Sell Signal July 27, 1946 197.63Rottom Buy Signal October 14, 1946 168..'37Top Sell Signal· April 8, 1956 521.05Bottom Buy Signal November 25, 1957 438.68Top Sell Signal August 16,19.59 658.74Trend Buy Signal January 9,1961 615.66Top Sell Signal December 24, 1961 720.87Ho'tom Buy Signal June 25, 1962 . 535.4~

There w-pre only nine signals which required action duringthe twenty-two years from 1942 to 1964.

THE TTAT.T.En THF,OnY78

H~n~ is n list of :11!th" signals prodllced by the l lnllorTheory dnring the pf'riml from 1942 to 1964.

DTT A Typ(~ of SignalSignfil Datp . - ,-.----·--·1-- S' -1----S;'-I;-i-0,1942 I07.50 PrimaryTrcnc Buy : Igna -

I 97 1";ffJ ]97.03 PrimaryTrend s-u Signal J11v z r , " ,I, 1" At' lRR.37 PrimaryBottom Buy Signal Oct .. ",,,.,1)I(} ]047 ]71 f52 ConfirmingBottom I'ny Sigrnal May . 0,' .- - 19 '7 ]R477 ConfirmingTrpnd BlIYSignal Jnly 12, . 't" .

. . I 0 ] ""''' !i2105 PrimaryTop Sf'll Signal Apri 0,. ;}.)O 0 •. 0Trend s-u Signal Mav 2G,]95fi 472.49 Confirming

S I N - 2'" ]9"',7 4~R.fiR PrimaryBottom nllY, igna ov. ,oJ,. 00Trend Bny Signa! Jan. 207,105R 4!i0.fJ() Confirming

A 10 ]9"'9 O!"'lR.74 Primary1'0\) Sell Signa! I1g. ), - .. ),- r:: ]9"'9 "r::21R ConfinningTrend SP11Signal Sept. .J, .0 0)' ,).) . .Q 1""1 f,IS.G6 rrimaryTreml Bny Signal Jan. " ,,,)

. ,." 19"] 720 R7 Primary1'O!1 Spl\ Si~1J1al Dec. :;"', . I)- •,.., 1()" 19"2 A-/920 ConfirmingTrpneI Sf'll Signal Apri /":J, • n .1 _0.()'" 1""2 r::,,'"4" rrimaryBottom Buv Signal Juno /.,0), ,,,) oJ.)'). - oJ

. I J G 1n03 G02.23 ConfirmingTrend nllY Signa . an. J, • J,

1'1. I f tl]O T·TallerTheory snv tlmt action shollld he1(' 1"11 ('S O. v. . - , !

taken on the prinwry signal, which occurs first. The. ~Ignawhich nC('lIrs secolH! is a confirming signal, and rf'(llllles noaction. If there is no top or hottom si~'.n<ll,one should takeaction on 11]('next Irem1 signal.

EXAr-.f1"lF.: Sf"lIing was (';]l1c(l for on lhe Top Sdl Signnl ofD('c. 94, 1961. The Trr-nrl Sell Signal, which f~)ll()\\'ed on

A-.. ·'120 IC}62 W<lSa connnnin<1 siznnl, and re(l'llrccl no rm-pl1 ",' , , b 1:' ) 24I . f since sr-llinz llad already I<lken place on T cc. ,

tlf'TaCIOlI,< ." h

]961.

CHAPTER 10

CHART REVIEVV

In this chapter is presented a review of stock market actionduring the last twenty-two years, showing how I analyze themarket and recognize b11Y and sell signals, according to therules of the Haller Theorv.

When reading this chapter, it would be wise to frequentlyconsult the accompanying charts to better understand theactions descrihed in the text. I wiII describe the market ac-tion at length to help you understand every detail of theHaller Theory.

On some of the charts, the Advance and Decline Indexwent IIp so far that I had to reduce the scale to keep it onthe chart. On a few of those reduced scale charts, there wasimportant trend-changing action which I wanted to show inthe larger scale, for greater detail. To accomplish this pur-pose, I used reduced scale and regular scale for differenttime periods on the same chart in several cases. In that wayI was able to confine the use of reduced scale to the periodswhen there were no important buy or sell signals to illustrate.

The nurnhers in the scale of the A & D Index go up to9,000. 111en Ihey start over again with 0000 - 1,000 - 2,000-3,000 etc. It WaSdone that way as a reminder that the A & DIndex is a cumulative index. The numbers of the A & D Indexdo not have any importance as definite numbers, but ratheras units of measurement which are used to measure theam01111tby which the A & D Index changes its direction,

79

194219113 .- _ ..__ ..- n.

- - ---~-I- - -"- --_ .._-- 1.

~-l-e- I- -f...- I- -- -_ ..

~------ -~- V-\ •... 1

1-- - FJ ~'V VDOW-.JONFS 1--- I\::;

,-_.JlID.ISTRIAL AVF.RWE ~ -- ---- -- 1.

i-I- V"

I- - .-1- -- - f...- - - fJ'.-- _.- -

- -- - - 1....-N~ v -1-1 1

1-1-- \----

I""'-~-1-- -- .-

~f'

1\

~ ~- 1--. 1

~ - / -187lt

~ ~ 1-- .- -'

-- -- -'17 IN

~ f-- l- I- - I--j - - - 1_. -,<,V 1-.-

1-1-- --

- -- - Anv~NCE " DECLINE IlIllJi:X

REJ)\JCF.D SCAI,E IN 19lt3----

I- -- -- J -- _.- -...,-- - -- --- -_ .. ·--1- --I- --- .- j

--I- r\~I-I- --- ._-_. --I- - 1·-I- - - I-

- -- ._ .. - -- - -----~- • f-- >-..

I- --1--' I- r- -'- - -- -'-" --- I- I- -- - ..-I-

I- I··· TRE1lD BUY SIONAT, L- ._- -_.- _c' 1- --l- I- ---- .-1--

I- - _.--. . [\-f7

~

' .._'-- 1-.- - --f-._-

.- - --_._- . :-::: El. .•....+2h5o

- --I- ---~t - ,'- ._. -- -"--- .. ._- _ . ._- --

f- - --1- ._- -- _. _ ..I- - y

- ._e'_·

'tJ ltiIIEW --'- .-- -- -- --

-~

..•- _.-- - _.--- 1- - I- r~ -1--

- .... - .'--. - -"-- -- - -- I- --V .",-

f'}-'

I- !-1 -- .. - --I- -1- ,/L.•.••• , .. . ---- - _.-. ---'- _.f- -_.f- _ •....•- ~--,..- ...:: ~L.,.- .- - --l-

i- ~ ---- .-I-"L- - -- - -- -- _.- --- - --1- - - g\! •. -- -- - 1-- -~- ..-1·- . _1-· - - .-----

-- --

~

-- - -f -- - -- -- - --_. --- .. ' f- -- --

I- - -- -" -

~

I- -- --- i- i..·· -

86 92 A 1 - 1-

- ---I- - - 1 .-J '\ •.I l- .- 0t;--I· -I- ~.J L-o. I ••.•... II'

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8000

7000

6000

5000

booo3000

2000

1000ooסס

20

10

00

9000

8000 'f,IELD,.0,.'}6.06.,7.07.'}

7000

6000

boo300200100

o100200

300!too

80

1945 DJIA.

200

/\j

190

/180

II i'\ II 170

1/ to 1/ ~ '"j160

19""~~-- ~-

- - -e--jI- _ DOW-JONES

I NIlUS TIl IAL A VF.RAOF.--~'--r- -

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6000

5000 ---sooo -- _.- - _. --1-- - /

3000 -+~ .--1-- . 1/20001- --1-

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}oJ I

9000

80007000 -- -- -- -_.

6000 -- --- - - .-1-

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3000 f- - - - - ~ LV - -- - ,-2000 _ J

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89000

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4.0b.55·05.S

500

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100 ?\;:;Jo

100

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rI

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6000

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I.

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1-. _. -~ START OF -ijhl - -!--

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. ,'j: 1952---1- - .- 1953 _. I---

~: .-4!f I 1-- D':It ><;< D01'I'-JONJiS# ~." iNnIJSTRIAL AVERAGE

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~i~

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70

A

260

1

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9

8

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~

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1955

- ~SO

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s.e..~5.0$.>

AnVlNCE ~ UEC!-TNE nT1lf1:RF.lJ1IGF,n BCA.LY. IN 1r>51J

NDJFMAlfJJASOnDJF.

1\6

)2S

'---- D.HA.,10,004904601170],{,(J11,0IIho430

- --- ----

---A & D INDEX

)002000 ---1---1-- - - . ,- --- .- '-1-1-1-

--.- - --~- -- --.- ---, --_. -~ .-- _.~I-I------- - - -l-l-

coo : ~: - L__~~~= -- ,\1---i- -f- -- I!E:'!' _ --i- BOTTQyr_j,lI

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100 -----+-. --.-BOO . - ------ 6,6.... _..

-- ---JFIlA.IlJJAS OllDJFIIAlIJJA50HD

--

. -1--

88

_____N=~=- ""; j:;:r,_'-- OOWJONES I

IImISTRUJ, AVF.RAGF, ,.,' \/\ 710

____ .. _ f- _ .... - J\ iF \ - _. ~:__ ... __ ....• _._. _.. V 680\ _ _... _ .. . I 670

.-'".rr=:= /~--=: -_. -r/- fFiK -' ;;;" _. fu~=HD.. \ .. ',. :; \- - ~., - _. -. c:-- 6Ilo

1000 \ 'j~=._ \ =::1- - - ~17- ..'j.: =: I=:-~ E:~~ooסס - _= _ ~.._.~ ._:~ .1' •••• t- ..-7' ..610

9000------'- .I\V /----\.'\.~ ... ~'i-- -.-- - -.-.-- I FAIUJP.EV 1_... 5:8000 .. 1- -- --.. -- ~i61O-f- --L-~-+- "--.::'!.2..~~.'ro~ 570

.._ .. _ ... -, .,- -1- -J. . - ~- SELL 560

7000 - '11 ./" =: r;.ti '..~.=- r~'~:NAL SION~

6000 - ---."..V '-.J -- .-.. ~_ '-- -i-- ..

J. &0 D INDEX:==~=~~~~=!~~------_...--2.97 't., .- _. -' T" - fUr.D

•••.•.3.0--.. ---- 3.5

---. b.o

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200100 .

o100 ~

200300 ._ __. ~I- Nfl - NL INDEX

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t

1

89

go

A~lJ

2000

H-- 1964 --1- 1965 _.-1-- - III -

.- -- OOW-JOlifflIIIUJSTRIAL HF.RAOF.

-

- - ._. -_.,.- - - - -- -- _. I

.-'\ \V_~7 ~

1- .... ._- - - f-.

7 - --.- )rd

~- -- -- -- - r- -PEAK

.. I-n-- ''\ l_. - - -

-- _.

"",I.

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-- - - ...- --_.).09 .• - -1- - -

YIElD1\ - --. .- - .- - - - ~- -'-.~ _. - ....-: ---- -- - -- -- - -- -- --- ..- -.-- _.- .- - - -- - - f-- - - .- --- - -... .-_.

~.- -

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II'.r ,IJ - 1 .- --- -M

---- -'--- ~- .... .-_ .

1I1l-1lL IIlDEX-- .-~- - _. - - ---- .... -_. _ .. ._- - - - .--... .- - -' .- --.'-- -- ._-- - -' .- - '- - ._.'- - ... --".__ .. -- -- - '\- -- .... _-

._- -- --_ . _ ..~- - - _.-

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-- - --- -- ---_.- --_._._- - - -

- - VOWIIE6 lIEEK VOVIIiO AVERAOE

I ~1~ 'n FJ F II AIIIIJ " J II A II J J A S 0 II D

DJIA

900

660660640

620600

7607607&0

1000

ooסס

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).0

JSb.o

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200

100o

100200

)00

262422

20

16

1614

28262b222018161b

I:HA TIT nEVmW

1942The yield of the Dow-Jones Industrial Average was more

than 5% during the entire year of 1942. So there could he noTop SeH Signal or Trend Sell Signal during that year. Therules state thnt tllere can only he a Trend SeU Sigmll whenthe yield is less than 5% at the time of the signal. Then~ cannot be a Top Sell Signal unless the yield has decreased toless than 4% at some time during the hull market.

During the first part of ] 942, the stock market continuedthe big decline which had started several years before. Thelowest point of the market was reached in April.

There was no Bottom Buy Signal because there was noselling climax. The greatest number of net weekly new lowsreached during 1942 was only 420, which was considerablyless than the 750 net weekly new lows required to indicatea selling climax.

A Tr~nd Buy Signal occurred on Septeml)(~r 19, 1942 whImthe A & D Index had risen 9,,1.50 points from its lowest pre-vious point. Enough net weekly new highs to confirm thesignal had already occurred several months previously, dnr-ing the second week of Jllly, when 86 net weekly new higllswere recorded.

During the rest of Hl42, Ih0 stock market rose stl~adily andstrongly.

]943Tho vield was more than F)r'!r, (lnring the entire year of 1943,

so tJ1f'r~ could be no sell signals of any kind.Dming the first part of the year, the market made a smooth.

and powerful rise, accompanied by increasing volume. It wascharacteristic nf the early stage of a bull market when greatstrength is displayed. The last half of 1943 was typical of

CHART REVIEW 93

market top areas with the NH-NL Index past its peak, andslmwing weakness. Volume had also reached its peak aboutthe same time as the NH-NL Index.

The A & D Index was having large reactions, and made alower low in November. That lower low was a failure, hutthe yield had not declined to less than 4%, so a Top Sell Sig-nal was not possible, The high yield prevented the start of ahear market, even though the market action was typical oftop areas.

There were no Signals of any kind during 1943. The onlyaction required was to maintain the long position establishedin 1942.

1944

The yil'ld was more tlwn 5% most of the year, declining toless than 5% during the last few months. So no type of sellsignal was possible until Octoher. From October on, it waspossihle to have a Trend Sell Signal. The yield remainedmore than 4%, so a Top Sell Signal was not possible.

During the middle of the year, heavy volume appearedand started off the second sta~e of the bull market. Thethrustkept the market heading upward strongly in the sec-ond hRH of 1944. There were no Signals of any kind duringtlmt year.

1945The yield was less than 1)% during the entire year, so a

Trend Sell Signal was possible at any time. The yield de-creaser'! to less than 4% in September, so a Top Sell Signalwas possible after that time.

The strong upward movement, which is characteristic ofthf' early stage of a bull market, continued during the firsthalf of 1945. There was a fairly large reaction in July. That

CfTAHT nEVTKW94reaction only carri('d the A & n Index downward 2014 pointsfrom ifs highest pr('vions point. so it did not callSe a TrendSell Signal, which requires a decline of 2400 points find 80net we('kly l1('Wlows.

\Vl1('n the A & D Index declined in [uly, it was not a fail-ure because the previous low in May was made on a oneweek movement. A one week movement does not constitute arallv or decline. It lakes a movement of two w('pks in thesa~e direction to make a rally or decline.

Toward the end of t118year, the market resumed its strongupward movement. Th('r~ were no signals of any kind rlur-ing 194!).

';f1w natural dcath of President Frnnklin D. Roosevelt onApril 12, 194!) was not tno much of a surprise and t1.1f'I'doredid not shock tlw stock market. It caused only a minor de-dine.

1946

The vidd was less than 4% during the entire year. so it waspossih1~ to have a Top Sell Signal or a Trend Sell Signnl atany time during 1946.

Doring 'March the stock market ('xj)('rieneed its largest re-action iJ~ several yenrs. At tho bottom of the reaction theA & D Index had onlv r1eclinpd IGOO points from its highestpoint, so no tnmd signal occ11rred---even thOllgh there were170 w('pkl" riot new lows made during that reaction.

TIl(' hiE;IH'st point of the bull market 'vas made in Junewhen the DTIA reac11Pd 212.50. It was a level rememberedfor years bymany sad investors.

At tI,e top of the bull market, tlw volume was much lowerthan it had heen durin?: the strong nclvance of Jan11ary andFehrnarv, ]946. Th« NH-NL Index also was far holow its pre-vions peak when the hull market reached its top. The greatf'st

CHAnT REVIEW 95number of net new highs occurred in January and February,at the same time as the greatest volume appeared.

There was a failure of the A & D Index in July, but therewas no Top Sell Signal, because the market started down,and never recovered to complete the top signal formation.

A Trend Sell Signal marked the start of a bear market onJIIly 27, 1946. At that time the cumulative net weekly de-clines reached 2700 points helow the previous high point ofthe A & D Index. On the same date there were 285 netweekly new lows recorded, which was far more than the 80required for a complete signal.

Right after the sell signal, the market had a weak rallywhich lasted only two weeks. Then came the crash with, ,prices going down rapidly on large volume. It was the worstmarket decline in many years. -

Then came a clearly defined selling climax when 758 netnew lows were recorded during the third week in September.The Bottom Bny Signal called for buying on October 14,1946, which war; the starr of the fourth week after the sellingclimax. At that time the DJTA was at 168.37.

During that fonrth week the DJIA reached its lowest pointin 1946, which was 163.12. The lowest point in 1947 wasHl:1.21. Tho very lowest point of the entire three year bearmarket was destined to occur in 1949 when the DJIA reached161.GO. During the three year hear market. which continuedafter the Bottom Bny Signal of 1946, the DJ1;\ never went asmnoh as seven points lower than the 168.:37 recorded at thetime of the buy signa 1.- ~

Dnring 1946 the Haller Theory Trend Sell Si~nal clearlyindicated the start of the hear market and the time to sell outthe long position estahlished in 1942. That was also the timefor those interested in short sales to establish a short posi-tion. Then the Bottom Buy Signal indicated the exact timeto cover shorts and take a long position.

96 CHART :REVIEW

1947

There were large rallies and declines during 1947, hut themarket could not gather enough strength to sustain a 111111

market.Durinz the first h::J1fof the year, the A & D Index went into

a big de~Jinc wlrich went down 5000 points. The yield wasless than 5%, so there could have been a Trend Sell Signal ifwe did not have a rule which prevents us from giving up agood long position tahm at a Bottom Buy Signal.

The rule ~tates that a Trend Sell Signal can not follow aBottom Buy Signal. A Bottom Buy Signal must be followedby a Trend Buy Signal hdore there can he a Trend Sell

Signal. .'Bear markets are sonH'times charnctenzed by WIde reac-

tions, upward and downward. Some of the declines may carryprices below the point ",'here one had. hought at a BottomBuy Signnl. But the huying opportumty offen,d hy a ~):armarket selling climax Is so outstanding that the pOSItIOnshon ld not be giVl'll up f'asily. .

If one had heen frightpnl'd into splling on that 5000 pomtdecline of the A & D Index in early 1947, he would have beenoffered :1.nother Imving opportunity in a fpw wpeks. at evenlower prices. Ano'ther selling clim:lX occurred during thethird ~~'~ekof April, whr-n 780 net weekly new lows were

recordf'd.'111emles called for hllying at the start of t1H-~ fourth week

aftAr the climax week. The date for lmying was May 19,1947. At thnt time the nJTA was 171.52. That week turnedout to he the lowest point reaf'hed hy the stock market duro.jng 1947. -.

On May ~9 some stocks were slightly highe; than they,were in Octoher, 1946, hut most stocks were shghtly lower,on 'May 19, 1947. For an investor who had already hmlght on;

CHART REVIEW 97the Bottom Buy Signal of H146, the Bottom Buy Signal of1947 offered a good opportunity to do additional buying atthe lowest prices of 1947.

A Trend Buy Signal occurred on July 12, 1947 when theA & D Index had advanced 3750 points from its low, and theNIT-NL Index registered 90 net weekly new highs. An ad-vance of 2400 points is all that is required of the A & D Index,but the signal was delayed by the inability of the NH-NLIndex to reach 80 or more net weekly new highs. That buysignal was a confirming signal, and no buying was called for,because bllying had already been accomplished on the Bot-tom BlI)' Signal which had occurred before it.

During the last part of 1947 the A & D Index went into a3600 point decline. There was no Trend Sell Signal becausewhen the A & D Index had declined more than 2400 pointsin the first week of December, the yield was 5.08%. The fol-lowing week the yield increased to 5.33%. Then the yield ofthe DJTA remained more than 5% for almost seven years.

1948The yield on the DJTA was more than 5% during the en-

tire year, so there could be no sell signals of any kind.Dming the first week in April the A & D Index recorded an

advance of 9A50 points from its low, and the NH-NL Indexshowed 210 net new highs for that week. It would have beena Trend Buy Signal except for the fact that there had beenno Trend Sell Signal since the Trend Buy Signal of July,1947.

The rules state that there can not be a Trend Buy Signaluntil after there has heen a Trend Sell Signal, because thereis no need for a Trend Buy Signal when a long position hasalready been established, and is still being maintained. Thetrend signals must follow each other in orderly progression.

98 cn"TIT J1EVTRW

During fhp third wf'pk of Angnst tllP A & n Index had df'-clined 2ROO points from its high, rind there were J 00 netweekly new lows. But th('rp c(mld nol hI' a Trend Sf'1l Signalbecanse the yic1d was more than 5%.

The stock market had a fairly good rally in 194R, hut themarket could not muster (mongh strf'ngth to sustain the ad-vance and get a hull market started. Tlw big rally of ]948turned nut to he only a secondary reaction in a three yearbear market.

Of COlJnW that was not 8pparent unt il aflerwnnls. At thetime it bpppnf'd, it rml!Iy looked like the start of a new Iml1market. The years of 1947 and 1948 were pnzzling and fJ'1lS-

trating to most investors, for it was difficult to nnderstnndwhat was hflppening.

The Haller Theory did not call for fiction of any kind dur-ing 194R, f'xcept to'm::Tintain the long positions f'st:.Jhlislwdat the wonderful hnying opportnnities identiflf'd hy 111f'J3n!:·tom Buy Signals of UW) and 1947.

Ul49

Tlie yi('ld was more tlwll 5r:1J dl1l'ing the entire )'f'ar, so nosell sigrds of any kind were possihle.

J 949 stflrted 011tto h(' ::111at her bear market year. The mar-ket driflr(J down until JII11('.Tn Jnne tl]('r(' was a small sP11ingclimax, hnt not enongh to meet the n~qnir('mf'nts of tllP HnJlcrTheory. So no action WflSc:111e<1for.

During (he [ourll: week of July the A & D Index h:Hl :1(1.vanced 24fJO points from il~ low, and tllPre were 110 net newhighs. H was not a Trf'nrl B1\Y Signal because it was notpreceded by n Trend SP11Signal. An investor following theHaller Theory would still have the long positions initiated in194A and 1947 at lower prices.

Looking hack, we can see that it would have heen a good

CHAHT REVIEW 99spot for additional huying, hut there was no way to knowthat at the time, unless one had noticed the higl~ yield. InJune, 1949 the yield had increased to 7.46%, which was a his-torically high level. ThPfe have only been a few times in thiscentury when the yield went over 8%.

During the last lUlU of 1949 the market continued movingup strongly on increasing volume. By the end of the year,the market had gone so much higher Ulan the 1948 peakthat it looked like a major hull market was under way.

TIle Haller Theory called for no action in 1949, except tomaintain tlw long positions established on the bottom signalsof 1946 and 1947,

1950

The yield was more than 5% during the entire year, so 110

sell signals of any kind were possible. .The market moved up on increasing volume, interrupted

hy a large reaction in July. That reaction was caused by theentry of the United States into the Korean War on [une 27.I remember spending much time in a broker's office, watch-ing the panic develop.

Dming the panic in July, there was a failure of the A & DIndex. Since the yield had not declined to less than 4%.' ,,' - ,'·here could be no rfop Sf'l1 Signal. Therefore the failnre hadno significance at aB. The panic did not cause a sell signal orend the hull market. When the reaction ended, the marketmoved upward again on good volume, through the end of theyear.

The HaBer Theory required no action during 1950, exceptto maintain the previously established long positions.

100 "TTATIT REVTEW

1951The yield was more tl18115% during the entire year, so no

sen signrlls of any kind were possible.The greatest volume of the bull market occurred in Janu-

ary. J 9!'i1. During the rest of the year, the market experiencedlarge reactions and rallies. During much of 1951 the marketmoved upward on decreased volume. Such action usually istypical of top areas. But the yield on the DJTA never wentbelow 6.2% during the entire year, so the market could nottop out on such a high yield.

There was a failure of the A & D Index in May, but therecould he no Top Sell Signal because the yield had not de-clined to Ip.ssthan 4%.

On the third week in May there ,,,auld have heen a TrendSell Sigllnl if the yield had not heen more than 5%. Thenthere would have hep.n a Trend Buy Signal on the thirdweek in August. S11ehaction would have resulted in a whip-saw, with a small loss. That is a good example of how thertrles about yield have prevented losses.

There were no signals of any kind dming 1951. The Hal-ler Theory required no action, except to maintain the pre-viously estah1ished long positions.

1952The yield was more Ihan 5% dming the entire year, so no

sell signa Is of nnv kind were possible.There were fairly large reactions dming the year, and the

market continued 10 work higher on df'rreased volume. Therewas a Inilure of the A & D Index in May, and again in oc-:tober. but there could not he a Top Sell Signal beranse the.,yield had not declined to less than 4%.

There were no signals of any kind during 1952. The only

CHART REVIEW 101

action called for by the Haller Theory was to maintain thelong positions estahlished in 1946 and 1947.

1953

The yield was more than 5% during the entire year so itwas not possible to have any kind of sell signals in 1953-

The market reached its highest point early in the year.Then started the larg.est secondary reaction experienced byany hull market during the 22 year period from 1942 to1964. Some people still say it was a baby bear market. TheHaller Theory indicates that it was a temporary interruptionbetween the two stages of a seven. year long hull market,hecnnse the yield was never less than 5.45% at any time dur-ing 19.53.. Hegardless of what anybody says or thinks, the fact is thatIt was a Imge de~line which lasted six months from top tobottom. The declme was a. real test of courage for investorswho wanted to maintain their long positions.

1953 was one of those years in which. there was little, ifany, progress for long term investors. The market ended theyear lower ~han where it started. Such action is upsetting~nd Frustrating for the majority who are impatient to seeImportant l:rogre.s~. The successful investor must be patientand hold Ius pOSItIOnas long as it is right for him to do so.. There was a .failure of the A & D Index in April, hut the

yield was too hIgh to permit a Top Sell Signal.J f the yield had not been more than 5%, there would have

been .a Trend Sell Signal on the fourth week in April. Atthat t ime the A & D Index had declined 3000 points, and therewere 510 net new lows for the week.

There were 720 net new lows during the second week inJu~e. It was not enough of a selling climax to meet the re-'quirernents of a Bottom Buy Signal, so no action was called

J02 cHAnT Im"T!':W

for. T),,, Ihird w('l·k in S('ptel1lhcr also H>cnrrh'd 71() nr l l1('W

lows.There were ]10 signals of any kind rIming lH5:1. The only

action reqIlired hvthe Haller Theory W<lS to maintain thelong positions ('stalllisllf'd at the hO!tOlTIS of HMo and Ul47.

1954

1'h(' vieM was more than 5% dllfing Ilw Iirst half of theveal', s~ it was not possible to have any kind of sell signal;111rin g Ihe first ldf of 1954. The yield W<lS les~ than :1%f1l1fingthe last half, so a Trend Sell Signal was pass~hle dlJr~ngthat Iimp. The vlekl was not less thrill 4% at any rune dnrIngthe yp:lr, so a '£'op Sell Signal was not possihle during 1054.

E~rlv in 1954 the second stage of the hnll market started.The sl~ck market blasled upward like a rocket, wilh con-rinously incre:1sing volume. The lnrge move llpwanl wassmoo1h and strong dnring the entire year. It was the kind ofyear that mal<cs investors happy.

Dnring the fonrth week in Jannal)! the A & D Index hadturned l;p 4000 points from its low poin;, and there ~..,ere120 net weekly new 11ighs. It was not a [rend Bny SIgnalhecause there had not heen a Trend Sell Signal before it. A··long position had already heen estahlislwd, years hofore, soa Trend TIny Sign:ll was not necessary.

Tl1('re w~re no signals of any kind (hlrillg 1951. The onlyaction ('alled for h)~Ihf' Haner Theory was to ll1aintnin thelong positions estai)1ishcd in ]946 :md H).17.

1955The yield was less than 5% during the entire year, so Q'

Trend Sell Signal was possihle at flny time dming Hl55. The;

CHAIIT 111<:VIEW 103

yield was 3.91% 011 the fourth week of September, so a TopSell Signal was possible at any time after that.

The largest volume during' the second stage of the hullmarket occurred dllfing the first two months of 1955. Themarket went IIp strongly at that time. There were wideswinging reactions in the second half of the year as the mar-ket worked upward on decreased volume.

The stock market made its highest peak of the year rightIleal' the end of 1955, hut at the same time, the NH-NL In-dex made its lowest peak of the year. The trend of the NH-NL Index was downward for the entire year. Each peak ofnet new highs was 10\,,'('1'than the previous peak. It wastypical top area action.

The A & D Index had a failure during the second half of1955, and just lwfore the failure was a movement which wasnot a failure. Since the two are side by side on the chart,this is a good opportunity to use it as an example to point outthe difference between a real failure and a false failure.

First let us disCIISSthe false failure. The A & D Index madea lower low in AllguSt, hut the low of the previous declinewas produced hy a one week movement. The rules state thata one week movement of the A & D Index is not a rally or adecline. A rally or docline must consist of at least two weeksmovement in the same direction. Therefore, the lower low illAugust was not a failure.

The real Failure was in October when the A & D Indexclearly made a lower low. The yield had reached 3.91% inSeptember, so the failure was an indication to start watchingclosely for a Top Sell Signal.

The TIlles state that the time to sell is on the third of threepeaks. TIle first peak is the highest point reached by theA & D Index 1Jefore the failure. The first peak was on thefourth week in September. The second peak was reached on

the second wer-k in n(~('f'llIl1Pr. The third peak was Oil thefourth w('rk of j\,f:ueh,HI!lG.

The shock of President 1~isenhower's heart attack in Octo-her efl11sedthe stock marker to drop sharply in a quick panic.At that time the A & n Index declined 2,2RO poilll~ from itshigh, That was not enongh to meet Ihe requirements of a2400 point decline nC'cded to create a Treml Sell Signal, sothem was no Trend Soll Signal during 1~55.

The failure in 195:5 reqllired a close wntch of the A & DIndex to see if the Ihn~e pcaks w0111d form lwfore a TrendSell Signal would in(lieate the start of a hpar market.

No selling action was required in 1955. Them was no rea-son to dislmh the long posH ions estahlished ill Hl16 anrl1941.

1956The vielll was less than !'i% during the entire year, so a

Treml Sell Signal wns possihl« nt anvtime rlming 1956. Theyield hr«l reached ~,m% ill Septemher, 1955. so it was pos-sihle to have a Top Sell Signal at any time dming HI:56, eventhou gh 1he yie ld was never less than 40/" dming 19;)6.

The niles state that, in order to have a Top Sell Signnl,the yield on the DJTA must have rparl]('rl a levd of less than4% 'at some time'dming the 1)1111mnrket. Thnt nile W:lSclesigned tn m;!~(1 allown;lce for the fnrt that tllP lowest yif'ldof a hull market is sometimes renched as long as nine monthsbelore Ihe act11n1tnp of a hllll market.

At the start of HJ;5'o WflSIhe time to Sf''' if there wOlllrl h(' athird pe:1Kof thf' A & l) Index lwforf' rhr-re was n Trend SellSignal. The first l1pwarrl movement :lppenrerl in the Orstw~ek of Fehruatv. It was only a one week movement 11r-

warrl, so it was not the srart of the rally toward tho third

peakOn the first week in March the A & D Index had moved

CHART REVIEW 1°5upward for three weeks. So it was apparent. nt that time,that the third peak rally had started. The third peak rallyprogressed perfectly, reaching its highest point on the lastweek in March.

The 1lI18s cnlkd for sdling when the A & n Index haddeclined for al least two weeks and 300 points from the topof the third peak. That was accomplished, and the Top SellSignal was completed on April 8, 1956.

'Twenty-five weeks were spent in the progress of the A & DIndex from tlw top of the first peak to the top of the thirdpeak. When the top of the third peak was reached, all therequirements of a Top Sell Signal had been met.

1. The yield of the DJIA had declined to less Ulan 4% atsome time during the bull market.

2. The bu U market had been under way for a year or more.3. There har] heen a failure of the A & D Index.4. Weekly net new highs were less on the third peak than

earlier in the hull market.5. Volume was lower on the third peak than it was earlier in

the hull market.

Right after the Top Sell Signal the market went into atwo month decline, which resulted in a Treml Sell Signal 011

May 26, 1956. On that (late the A & D Index had declined2500 points from its high. and there were 290 net weeklynew lows. The Trend S('J] Signal confirmed the start of ahear market. 1'111" trend signal did not require any action,for selling had nlre:Hly heen done au the Top Sell Signal.

In August the n.TJA advanced to almost the same heightH had reached in March, but the A & D Index had only a2000 point rise, and did not go near its previous peak. TI;erewere fewer net new highs on that rally, and the volume waslower than it had heen on the third peak rally. Therefore,the rally was weaker than indicated by the DJIA.

106 elf Anr REVIEW

By tl\(' e11dof 1H;:)(Jthe /\ & D Index and the NIT-NT. In-dex had pxpprienced lnrw~ cloclines. and were showing thewe8kness of t}e market, At the same time thc DJIA had 110tyet r-stah1ished a down t rend, and was less than 25 points he-low its Im11market high.

In If).'1Gthe seven year long, two stage 111111market cameto an end with a Top 5('11 Signal. At that time tl1f~HallprTheory called for a sale of the long position, held since 1846and 1947. The Top Sell Signal also indicated the time toinitiate short sales for investors intereste(l in selling short.

1957The lwhavior of tlw stock market in ]f}.f)7 was pnzz1ing to

many investors. Tlw market experienced a decline in Fehrn-ary. Then the DJT/\ went up until it was almost exactly thesame height as its highest point in H).50. The difference he-tween the DJIA at the 1956 top and the lW57 top was lessthan two points. Therdore, the majority of investors thoughtthe big rally of 1957 was still part of the seven year long 1)\111market.

The Haller Theory told a completely differpnt story. TheA & D Index only made a small move upward in 1857, whichwas not enough to even come close to a Trend nllY Signal.That wns an imlica!ion that the DJT/\ was making; a falsemove.

'fhe hig rise of the DJT;\ in 18.'17W;1S just a large rnlly in abenr mn rket, When the market started 1110ving oownwardfrom its 1957 high, there was so 11111ehweakness that the de-cline turned irtp a panic. The DJIA took a sh:1fp drop ill thelast half of 1957.

Near the bottom of thp decline, tllP liquidation was sointense tlwt a sdling climax developpd. The climax week wasthe fourth week in Octohpr when R!)(} net new lows were

cnAnT HEVIEW 107

recorclod. The Haller Theory caned for hnyillg (and cover-ing short snles ) on Novemher 2.5, 1957, which was the startof the fourth week after the climax week.

1958There was a Trend Buy Signal on the Fourth week of [ann-

~ry when the A & D Index had advanced 2700 points' fromIts low, and there were RO net weekly new highs. It was a~onHnning signal, and no action was called for because buy-mg had already hoen done 011 the Bottom Buy Signal inNovember, 1957. '

Dnring the first tl]ff~e months of ID58 the upward move-ment of the market was hesitant until enough strength ac-cumulated to send it soaring upward like a rocket headingtoward outer space. Everything was perfect for the marketduring the last nine months of the year. Volume increasedsteadily as prices rose, and there were no large reactions.The increasing volume and the strong, smooth ~1imb of themarket was typical of the strength which usually exists dur-ing the first phase of n hull market. '

The NIT-NL Index acted well until ncar the end of theyear when it showed that the strongest part of the upwardthrust might have ended. The greatest volume of the bullmarket wasin Octohpr and Nov~mber.

The yield was less than 5% during the last half of 1958,so i: would have heen possible to have a Trend SeIl Signaldllnng the last half of the year.

Th~ only action re(JlJire~1 by the Haller Theory during195R was to maintain the long position established at thebottom of the hear market in November, 1957.

108 r.TTAHT nEVIE'V

1959The yield was less than ,1%during the f',ntire year, s~ it was

possihle to have a Top Sell Signal or a 1rend 5('11SIgnal ntany time dming 1959. . .

During the first half of the year the DJTA was rlSlI1g ondeclining volume. ''''.1hen thn highest point of th~ hnll marketwas reached in August, the volnme was consl(krnhly lessthan it h~H1been in Octoher and November of UJ58. Themarket f'xperienced a large decline in Septemher.

Then the DJTA advanced dming the last three m()n~hs ofthe vear to make a new high in '[anuary, ]960. Many mves-torsfhouzht the highest point of the hul] market was in[anuary, 19GO when the DJI A made thilt new high. But thiswas not 11m case, for that rallv was a Inlse move of the DJTA.

Many we]] known stock a'vemges nnd the Hilll~r Theoryshow that the real top of th" hull market occurred 1Tl August,1959. TI", false move of the DJIA was one of the penoliaritiesof the stock market which heliJs to keep the majority of inves-tors in a state of confusion.

The weakness of the year-end rally of tlw DJIA was indi-cated by the action of tlH' NH-NL Index. On that rally therewen' no net weeklv new highs at aJ1uulil the very last weekof the rally, when 'there were only 10 net weekly new highs.The weflk~ess of that rallv was also rev('fl1f-d hy the A & nIndex which fldvanced ~111y GOO points during the entirelength of the rally. ....

During the last h:l1f of 1959 the 'wld(, sWl11gmi!reactions,the necreasen volume. tIH~weakness of tlH~A & D Index, andthe deerf'nse in net weekly new highs was typical of top areaaction. Divergellce, whiel, is frequently found at a top, oc-cnrred in April, May, JIlIy ~md August when the A & n Indexfailed to make new highs while the DJI A went on to new

highs.

CHART REVIEW log

The [nilnre of tIl(' A &: n Index in May was not too obvious,Im! it was clenrlv identified by strictly following the rules.

After til(' A &: n Index reached its highest point in March,the index had n two week downward movement, which con-stituted a decline, flccording to the rules. Then there was athree week movement upward, which constituted a rally.Please note thnt one of those three weeks was a downwardmovement, which was just an interruption of the rally. Sincethere were two weeks of upward movement, the whole threeweeks must he considered as a rally.

The rules state that a Top Sell Signal should consist ofthree peaks of the A &: D Index. The first peak is the highestpoint reached hy the A & D Index before the failure, The sec-ond peak is the top of the next rally. The third peak is the topof the third rally. So the first peak was on the third week inMarch. The second peak was on the fourth week in April.The third peak was on the first week in August.

The rules call for sdling when the A & D Index bas de-dined for at least two weeks and 300 points from the top ofthe third peak. That was accomplished, and the Top SellSignal was completed on August 16, 1959. All the require-ments of a Top Sell Signal had been met by that time.

Nineteen weeks were spent in the progress of the A & DIndex from the top of the first peak to the top of the thirdpeak.

TIw yield was only 2.92% at the top of the third peak. Itwas the lowest yield in twenty-three years.

night after the Top Sell Signal the market went into a de-cline which resulted in a Trend Sell Signfl] on the third weekin September. On that date the A & D Index had declined3100 points from its high, and there were 330 net weekly newlows.

The Trend Sell Signnl confirmed the start of a bear market.

110

No fnrthrr action was required. for selling had alrearlv hcendone at tllA Top Sell Signal.

In 19S9 the bull market onrne to an end witl) a Top SellSignn1. At that time the ITnller Theory oallod for a sale of thelong position initiated :It lhe hear mar~ct hotto0~. in 19f;~.The Top Sell Signal also indicated the lime to 1Il111ateshortsales for those jnten~sted in selling short.

1960Th0 vie1<l "as loss than 4% during the entin~ year. The

market"declined steadily dming the first half of 1960, hutthere was a strong rally in August. Then the market went ondO\vn to reach its lowest point in October. .

The mirl-vear rally of the stock market F(Jokelmany mves-tors into thinking the hCflT market was ended. In AU~llst,19GO the 01IA ralliccl to a higher high. nnd other well knownstock aver~ges also made higher highs. The A & D. Ind?xmade a higher high, and the NIT-NT, Index was defi11ltely man lip trend, making two higher highs. .

At that time I also mailllained many elmly charts. All thedaily charts looked very bullish, especially the daily a(lvancesand (1ec1ines.

Despite ,,11 tllf~hllllish charts and higher hig11S,the HallerTheory did not produce a Trend BlIY Signal, for the A & DIndex advanced only IG70 points from its low. There were nosignals of any kind during HJRO.

The only 'action eallcd for by the ITaller Theory was tomaintain the short position, in case one had sold short at thetop in Augnst, 1959.

1961

There was a Trend Rll)' Signal on Jrlnnary 9 when the A &D Index rldvalwcd 2950 points from its low point, and there

CHAnT HEVIEW 111

were 170 net weekly new highs. The buy Signal correctlyindicated the start of a hull market, and the time to covershorts and initiate a long position.

III typical fashion, the first phase of the bull market was astrong, smooth rise accompanied by increasing volume andan increasing nmnher of new highs.

During the second half of HJ61 the market advanced ondecreased volume. There were wide swinging reactions, andthere were fewer new highs. There was divergence when theA & D Index failed to make new highs while the DJIA madenew highs. It was typical top area action.

The highest point of the hull market was reached in No-vember. The lowest yield was 2.97%, which was recorded oneweek helore the top.

The yield was Jess than 4% during the entire year, so it wasposxihle to have a Top Sell Signal or a Trend Sell Signal atany time dming 1961.

There was a failure of the A & D Index in Tune, The firstpeak was in May. The second peak was in AuWJst. The thirdpeak was in December, The Iailnre and the three peaks of theA & D Index were very dearly defined, and almost perfect intheir formation. The divergence was obvious and easily no-ticed.

At the time the third peak fanned, all the requirements ofa Top Sell Signal such as decreased volume, etc. had beenmet. The third peak reached its highest point on the secondweek in December.

The rules called for selling when the A & D Index had de-clined for at least two weeks and 300 points from the top ofthe third peak. That was accomplished, and the Top Sell Sig-nal was completed on December 24, 1961. The Haller Theorycalled for liquidation of long positions on that date, and shortsales for those who might be interested in selling short.

Twenty-nine weeks were spent in the progress of the A &

112 CHART TIEVtR"r

D Index from thp, top of the first peak to the top of tho thirdpeak. Tt was the longest time interval hotweon the first peakand lhe third peak since 1942, anrl it was followed by themost severe h(':1r market since 1942. That interesting factcauses me to wonder if that time interval onn be llsed to fore-cast the smrcrity of tlH' bear market which usually follows a. .

Top Sell Signal.There was almost a Trend Sell Signal in September,

before the third pf'~lk was started. AI that lime the A & D In-dex df'clined 2284 points from its high, and there were 75 netnew lows. Those figures did not meet the requirements of a2400 point decline and 80 net new lows, so there was no sellsign:J1.

III nddition to the tpclmical indicntions near the top. therewas also large pnhlie participation in the stock market nt thattime. Thr-r« was much wild specnlalion in new issues dnringHlGI.

lD62There was one rnllv lelt in the stock market. Then the

markf'! went down If/prodnce a Trend Sell Signal on April29, 19R2. AI thnt tirno the A & n Index had declined 2708points from irs high, nnrl there Wf'H' :100 net npw lows. Theyif'ld wns less than 4,?{· at that t imr-. It wns a confirming sig-nal, all(l no nr-Hon was required. Sr.J1ing had nlrendv heendone on the Top Sen Signn] of Df'C'elllher, 1961.

"lhr-n r-ame llw r-rnsh. It wus 'he' worst stock mmkc·t crashsince Hl20 Manv illVf~stors, large ~\1l(1small, failed to recog-nize ~he d1.nger· signals and took no action to protect theircapital. Millions of people lost hill ions of clollms in that crash.

As the crash nppronched its haltom, the pnnic sp.lling be-.came so illtenSf'. that a sdling olimnx developed.

The first climAX wef'k was inclka!f'd when there were 800net weekly new lows recorded during the Fourth week in

enATIT REVIEW 113

May, The following week there were 1141 net new lows, sothat was the second climax week. The rules call for huying,and covering short sales at the start of the fourth week fol-lowing the week with the greatest number of net new lows.In this case the second climax week had the greatest numberof net new lows. .

The Bottom Buy Signal called for buying on June 25. ]962.At that time the market was within a few points of the abso-lute low of the 1962 hear market.

The Bottom Bll)' Signal was followed by a rally in July andAugust. Then a Inrge decline in September and October. InNovember and December the market went up strongly.There was almost a Treml Buy Signal on the second week inDecember, hut there were only 70 net new highs, which wasnot quite enough to produce a Signal.

1963The yield was lASSthan 4% during the entire year, so it was

possible to have a Top Sell Signal or a Trend SeU Signal atany time after the Trend Buy Signal.

There was a Trend Buy Signal on January 6. 1963 whenthe A & D Index had risen 4800 points from its low, and therewero 79 net weekly new highs. The rules require 80 net newhighs, but 79 is close enough. The signal was delayed formore than a month by the reluctance of the NH-NL Index torise to the requiredIove].

The signal was a confirmation of the start of the 1963 hullmarket. No action was required, for buying had already beendone on the Bottom Buy Signal of June 25, 1962.

In typical fashion, the first phase of the bull market was astrong. smooth rise accompanied by increased volume and anincreasing number of new highs. The strong first phase endedwhen a large reaction occurred in June and July.

CHART REVmW114

During the sr-cond half of Flf).l, (he.stoe!' ~lIn~'kptdis.playedtypica 1 top nrea action. There were w1(:e SWlllg11lg rallies anddeclines, and there were fewer 11m" hIghs, although volumehad not decreas(xl.

In Ootober, Novomhor and December tlw DJIA went lip tohigher highs, hut the A & D l nclox failed to make new highs.Su~h divergence is frequently Iound ncar mark!'! tops.

There was a failure of the A & J) Index in November. Itindic[l!C(\ tlie start of a Top Sell SigMJ1. The hig!wst pointreacllf'd hy the A & D Index belore the [ailure was the second.week ill September. That was th(' first peak. Tlw second peakwas on the third weck in Octo her.

It is interesting to note that tho second peak was formed in('xadly the same waY:1s the second peak of the 1959 top. Thebottom of the decline from the seoonr] pell k ooonrrerl on theFourth we0k in Novornlror, which wns tlH' week in whichPresident Kennedy was assassinnterl.

'1'110 panic s811i~p;caused hy the S11(I(1en dpatl, of Ill(' Presi-clenr almost produced :J Trend Sell Signal. At that time the;A & n Inrlex had decliJwd 2215 poinls from its highest point,and there were ]~O lI('\' weekly IIPW lows. The rules requirea 2-100 point (~ec1ine, so there was nil trPml signn1.

The llT1fxper/pd flSS~lssinfltion of Presirlen! Kennedy tookpbc(' (,:1rly ~n Ihn aflrrnoon of Friday, November 22, 1963.It was thp worst s!Jo('k ('VIOl' ~o l1il Ihe stock cxchanges of theUnifpd States, whi('h w('r(' in rni(lsps(;Jo)1 :1f' Ih(' time. Thepanic sellin?; was so rTrent that S()!1lP stocks dropp('cll.O% ?tH')0(, in a matter I)f miuutes. Tl10 D] l A dropped 24 points In

26111i1111tes.At 9,:07 P.M. I lint nftf'l1looll, the Board of COVCl1l0rs of the

New York Stock Ex('h~m~e annnnnr-erl that they harl closedtrrlcling bp('rlIlSe of t11f' flood of orders, 'Within ~inl1lcs, trad .•:ing stopped on nil the major stock nnrl commodity exehangesin the United States. It was the first time the NYSE had

CHART HEVJEW 115dosed in mid"sf',s·;jrm since the day ill 1933 when there weregas fumes on tllP floor of the exchange.

All stock exclwnge,,, in the United States remained closedon the following Mondny to give investors a chance to regainfllpir p(!'li1ihriul11. When the markets opened on Tuesday, abig rally erased most of the losses caused by the panic.Then the upward movement of the 1963 bull market was re-snmed.

It is important 10 recognize the fact that the terrible shockof the assassination and the stock market panic which fol-lowed did not end the hull market. No bun market in the lasttwenty-two yellrs has been ended by a shock or an importantworld-shaking event. Such shocks have only caused tem-porary interruptions in bull markets.

A cnTPflll sturlv of the charts seems to prove my contentionthat a bull markpt is a powerful entity which can not beki11mlhy shock, and it will no! die of old age. Apparently theonly tlJi~lg capahle of ending a hull market is its own progres-sive weakl1('ss-·a wcaknes» that can be recognized hy theHaller Theory.

1964

At the time of fhis writing, the lowest yield recorded so farin the hull T11::1rlwt was on 'fIJI" rirst week of 1964. The yieldwas .1.0Q10 (It that f ime. So it was possihle to havc a Top SellSi~nI or a Trend Sell Signal at any time dming HJ64.

Dnring the firsthalf of HJG4, there were wide swinging re-actions of the A & D Index, and there were fewer new highsthan earlier in the hull market. It was typical top area action.

The Top Sell Signal formation continued, with the thirdpeak of the A & D Index reaching its highest point on thethird week of ApriL By the time the A & D Index had de-clined two weeks and .300 paints from the top of the third

CHAnT TIEV1F.W

penk, it was ohvions Ihn! the VOJlIlllP had not only f:Jill'() todecline, hut had reachorl a new hIgh. Thp grcntesl: volume ofthe entire lmlJ market or-ourrerl OIJ tlw third pe:lk.

The Top Sell Signal rules SrlY that volume on tlIP thirdpeak must he lower than earlier in tIlf~ hull mnrkct. So therec0111d not he a Top Sell Signal at Ihat time.

This was the Ilrst time in twenty-two year.••that the stockmarket did not reach its highest point on th0, third peak aftera low yield [ailllTe of fhe A & D Index. Even though theevent I;ad not happened hefoH\ the situation was adequatelycovered hy the rule ahout volume.

There were also too many new IJighs on the tIlird peak.The rules say that the nnmher of "'PPkly net new high. s onthe third pf'ak should n()tl)(~ rnuo]: more than half as many asthe gTP::Jfrst number of nI'l new highs recorded f'nrlipr in theImll·mnrket. The Z3g 111'1: new highs on the thinI peakeqll al ('(179% of the ,1m net new highs recorded in ;\fay, J9G3.

It mny Iw signiflcant to ohserve that the stock market rallyof .Tn1y, 1964 went up In a new hi~~h on .~ltarply reducedvolume,

As of the time of this wriling, tlH'rf' were no Haller Theorysir.:nals of any kind rl'conll'd vet durlnv 19G4. No action was.

IJ. '" t",

called for during the first half of HI(J4, f'xcept to rnaintain thelong position eslnhlishcd :1t flw hottom of the hoar market in;.TIme, 1902.

The twentv-two YCflr period, from lCJ,12 to J!)A4, which wasrpvipwf'd hp~p, incluclos every conepiva111c type or stock mar-:h:t ac~ion, from Iioom to hnst. Durin!.; the period ImrieI' re-"ipw, tIl(' market survivorl World War n, the death of Presi~!dent Hoo<;eve!t. the Korean 'Val', 111(' Suez crisis, tl](' Rerlui;blocknrlc President Fiscnho\vcr's heart attaok, \11e Cuban;blocbdc' with its nuclear oonfrontation. and the :1ssassinrltioinof President Kf'nncCly."·

CTIt\1IT REVIEW

rksritp fhe m:'I11y unexpected events and internationalcrises, the Haller Theory correctly identified every majortnrning point in 'he stock market. Every signal was followed!l)' a profltahle move of the Dow-jones Industrial Average.rh~r0 were no losses. .

en i\ PTF.R 11

HESULTS

Here is a lahnh(ion sllOwing the resnlts which would havehccn ohtained hy following the Primary Signals of the HallerTheorv during the 2,2 yp:1r period from 1942 to 19G1. ThesefilTnrf'S do not inc-lude calculations of dividends, commmis-sions or taxes. Thes!' results are from hnying and sdling shortthe Dnw··Tones Industrial AVCf<1l4f' of:lO stocks.. .

TVl1P of Sigl1:l.1 Date DJIA Profit Loss. J -------. ---~'" ..__ .---- ------_._--~---- '--- _._--

Tnmd Buy Signa! Sept. 19, HH2 107 ..'10Treml Sf'1I Signal July 27, HJ4A 107.A.1 no 1.'3 0Bottom Buy Signn! o«. 14, UJ46 1118.87 29.26 0Top Spll Signal April fl, HJ5A r121.05 .'352.l1fj 0Bottom Bny Signal Nov. 2.'5, 19.57 -1'38.A8 .82..'37 0

Top S0!! Signal Ang. Hj, HJ.')9 R!1R. 74 2'W.06 0Trend Huy Sii!nal Jail. g, 19A1 m5.(J(J 4,'1.08 0Top S"" Signal Dr'(·. 24, 19(JJ 720.R7 1O!1.21 0Botlo111 lilly Sigl1:l! Jnn!' 2f5, HJ(j2 ;-;85.4.'3 1R;-;.4'~ 0Hecent Price Mav 3, 19(11 819.19 2RHJ6 0

If I II(> DJf A h8rl 11('('11 held oon tillolls1y for 11w 22 yearperiorl. Ihe nrof!t on Mny .3, 1964 wonk! have heen 7LJ.99points or 66~%.

If 111(' DJ11\ h'ld h('Pll hought, ancl sold short accon1in}~ to1118 Primarv Silrnals of the Haller Thoorv, the 22 year profitwoulrl l1:lv~ tot~ led 1,403.1:1 points or i,30!')%. ~

118

RESULTS 119

If 111('rekId 1)('('11 no short sales during the 22 year period,lhe Haller Theory results would show a proBt of 1,052.14pain Is odJRO%.

If $10,000. lwd heen invested in the 30 stocks of the DJIA in1912, and !H'!d continuously, it would have grown to $76,200.hy May 3, 1861.

By following the Haller Theory signals and re-Investingcapital gains, the $10,000. would have gro\\'ll to $275,865. byMay 3, ]9(34.

Tlw following resnlfs would have been obtained if the Top$p!l Signal lwe! not heen included in the procedure:

Type of Signal Date DJIA ProGt Loss

Trend nuy Signal Sept. 19, 1942 107.50'l'ronr] SPi! Signa! .July 27, 194fl 197.63 90.13 0Bottom Bnv Signal Oct, 14, 1946 168.37 29.26 0Trend Sell Signn! May 26, 19!5G 472.49 304.12 0TIoUqm nuy Signal Nov. 2!5, 19.57 438.68 33.81 0Twnd SpIJ Signal SPpt. 5. UJ.'i9 652.18 213.!50 0Trr-nr] 11n)' Sign:ll .Jan. 9, 19111 615.66 3fU)2 0Trend SpIJ Signal April 29, 19R2 672.20 5654 01loltom TIny Signn] J 111lf' 25, 1962 535.43 J30.77 0Hf'cpnt Price Mnv 3, 1961 819.49 284.06 0

This procod 11re prorluced excellent results, even withouttl1P Ilse of the Top S('ll Signal.

J20 RESVLTS

Tho following results would hnvn he en obtained hy 11singonly the Trend Signals of the Haller Theory:

Type o[ Signal Date DJTA Prollt Loss

Trend Buy Signal Sep!. 19, 1942 107 ..'50Trend Sdl Signal July 27, J94A 197.6.'3 90.13 0Trend Buy Signal J lily 12, 1947 1134.77 12.Rfl 0Trend Sell Signnl Mnv 2fl, ]956 472.49 287.72 0Tremel nny Signn] Jnn. 27, H).'58 450.66 21.83 0Trend Sell Sir;nal Sept. 5, 19.'59 6.'52.18 201.52 0Trend Huy Signal Jan. 9, 1961 615.66 3fJ.52 0Trend Sell Signal April 29, ]962 672.20 56..'54 0Trend Buy Signal Jan. 6, 196.'3 6fl2.2.'3 9.81 0Recent Price May 3, 1964 819.49 157.2R 0

These extra tabulations are presented to show the nmnzingaccuracy of the Hallpr Theory, even when only part of thetheory is followed. The three different tabulations of resultsillustrate that, during the 22 year period, every huy signaland every sell signal, regardless of whether it was n PrimarySignal or a Confrrming Signal, was followed by a profltahlemove of the DJTA. There were no losses, regardless of 'whichSignals were followed.

The average persoll does not llS11f11Jyfind it practical to buythe thirty stocks in the DJIA, and would flnd it too r-urnber-some to ~manage such a 'large portfolio. For practical pur-poses, one must choose individual r-quities in which to investhis capital.

The munl'ier of stocks in a portfolio must lJf~left entirelynp to the indivirJnaJ. If one holds many stocks, his risk isdiversified among many different companies. But it is difficllltto keen tr::lck of manv stocks at the same time.

Thc~·eis also the problem of selecting stocks which willmove with the market. The ideal situntion would 1)(' to hold

RESULTS 121stocks which will move with the market, and even outper-form the market. One should try to avoid stocks that mightgo down when the market goes up. One of the greatest dan-gers in selecting a stock is the possibility of buying stock in acompany whose fortunes are declining, and may ultimatelygo bankrupt. In that case, the stock would go down, andnever rise again.

How can one avoid dangerous stocks? Keep away fromthem. Don't even get interested in them. It is just as easy tobuy the higllest grade blue chip stocks as it is to buy the "catsand dogs".

It may take some sales resistance ifa high pressure sales-man telephones yOll, long distance, offering the chance of alifetime to get info Lower Siobhovian Mines, Ltd. He mayeven gllanmtf'e that the price of the stock will double in afew weeks because the insiders are forcing it lip. The insidersmay be forcing it lip all right, but when they hire salesmen tocall the suckers, that means they are ready to dump it.

It is amnzing to Sf'C how many fraudulent stock promotersare brought to justice by our alert Securities and ExchangeCommission. It is difficult to understand how the "BoilerRoom" salesmen can get people to buy such risky stock.Mayhe it is because the salesmen offer a chance to get richquick.

People frequenfly believe what they want to believe. TIleycan even find good reasons to rationalize what they wish tohelieve.

Some vears ago a friend of mine, who was a hard workerin the low income group, enthusiastically told me how he hadjust invested $ 1.000. in a wild-cat oil well. He thought it washis hig chance to get rich quick. A year later, all the investorshad lost their money. Nobody was cheated in that case,though. There simply was no oil where they drilled.

The person who likes to gamble with the odds against him

122 nF:SULTS

does not have much c1wllce of S11CC("'~.A s11c('essf111slrategycalls for :lCcepting a risk only when 1110 odds fire in yom [nvor.

A good policy might he 10 avoid mnr~infll companies. findjust stick to the highest quality stocks. One example of a highquality stock which provides anint('r('sling investment me-dium is Trt-Contincntal Corporation. It is a closed emJ invest-ment company whose stock is tradocl on the New York StockExchange.

Tri-Cont inental has a history of j'cing able to follow themarket fnid)' well. A large' investment rompnny li!w '11:11' 11S11-

ally carries a portfolio of more than 100 securities in TI1fmy

diflerr-nt industries. Their portfolio usua lly inclmles over-rho-counter stocks. common stocks traded 011 the NYSE and theAmerican Exchange, preferred stocks, industrial honds findgovernment bonds,

One of my f'lvorites is Tri-Coutinontnl warrants. They areperpetual warrants which do not have an expirat.ion date, asdo many other warrants. It might he wise to mention, at thispoint, thflt a warrant is a cel·tif1~ate giving tlw holder theright to purchase a cortn in amonnt of the stock of a corpora-tion at a certain pric~ within a specifbl time limit, or perpet-ually.

In this ense, the Tri-Continental wnrrnnt givps the holderthe right to purchase 1.27 shares of TY r-ommon stock nt allYtime at $17.76 per share A warrant does not give the holderthe right 10 cast n vote in ('orporate affflirs. and warrants donot pay dividends.

Then. yon may ask, "H TY warrants (10 not carry a vote,and do not pay dividends. what makes them so attractive?"Thf' answer is "leverage". 1.everage exists when the corporatestrnorure r-rmtn ins more ~hfln one type of security.

In this case, Tri-Cont iur-ntal has [our types of securities inits structure. At the lOp fire 20 million dollars worth of de-bentures. the holders of which are entitled to the first call on

RF~sULTS

rnrporflte income. and the first call on corporate assets, incase of liquidation. Next are 810,740 shares of preferredstock. which get second call on corporate income and assets.Next fire 7,40:3,82.5 shares of common stock, which are thirdill line for income and assets.

Then, at tllP hnttorn of the corporate structure. there are728,160 warrants. Since the warrants are at the bottom, theyhave a greater range of price fluctuation than the senior se-curities of the company. The securities at the top experiencethe smallest price fluctuations. .

To iIlnstrate the efr~ct of leverage, let us examine someprice changes of the Dow-Jones Industrial Average, of Tri-Continental common stock, and Tri-Continental warrants.

In December, 19!)1 the Dow-Jones Industrial Average wasat 2A5. Ten years later, in December, 1961 the DfIA was at730. The 4A5 point gain equals 176%. A $10,000. investment,continuously held in the DJIA, would have grown to $27,600.in that ten yen I' period.

In December, 19!)1 Trl-Continental common stock sold at14. Ten years Inter, in December, 1961 TY common sold at,1';2. The 38 point gflin equals 272%. A $10,000. investment, can-tinnously held in TV common, would have grown to $37,200.in tha t ten year period. .

Tn Decem her. 1851 Trt-Continental warrants sold at 4. Tenyeflrs later, in December, 1961 the warrants sold at 44. The40 point gain equnls 1,000%. A $10,000. investment, con-tinnuslv held in TV warrants, would have grown to $110,000.in that ten year period.

In addition to great leverage, Tri-Continental warrants rep-resent diversification in more than 100 different commonstocks, preferred Slacks, and bonds usually held by Tri-Conti-nental Corporation. The warrants have a history of movingwith tlH'l market, and outperforming the market.

Since Tri-Continental warrants do not pay dividends, they

124 TIF.SULTS

am intPrp.sting to rhose \,,110 might wish to sen short in a hearmarket. When a person sf>lIsshort, he must pny the dividr.ndson the stock lH~has sold short. T1H~party who loaned thestock to the short seller is entitled to the dividcnck Tlwre-fore, oiddf'nd expense must lie adrl(,d to commission expenseto calculate tll(>cost of selling short.

If a pp.rson maintains a short position for a. ye:lr or morein a.stock paying largp. dividends, the stock might have to de-cline 1()% or more for the short seller to jnst hreak even.With TV warrants a short seller does not have to pay nnydivi(lends, so his only expense would he for commissions.

Let us examine a taliulation of the results which wouldhave hwm obtained hy investing in Tri-Continp.ntal commonstock am1 Trl-Continentn] warrants. according to the huy nndsell signn ls of the ITnller Theory. Tn the following studies,stock priCp.snrc prr'sentcd in decirnn ls for more accurate ral-clllntiollS. Tn newspapers, stock prices are qllotp.d in fractions.

Tm-CON'TJNF.NTAT. COMMON STOCK

Type of Signal Dall'Cnpital

LOO9.5ll6.!10

27.r1'32R!)()39.Hil37.:'052~'R3!1.]347.00Totals

f!.503.00

21.]3n

11.Sf!2.Sf!

J4.8fl17.2511.f!7

!lO.39

ooo.87ooooo.f!7

s 1,000.s.soo,

12,.'302.53,133.5] ,459 .72.1)12.70,364.

JOn,900.142,186.

$190,S29.

Trend nllY SiglnlTrend S,,11 SignalBottom Buy Signll!Top Sell Si~nfllBottom Buy Sir-na!Top Sell SignalTrend Buv Signa!Top Spll SignalBottom Buv SignalRecent Price

S"rt. 10, )949..July 27, HH6Oct. 14, H116April R. 1956Nov. 2'1. Hl57A ng. ](1, 19!19Ian. n, 1901·DI'I'. 24. 19(HJnne 25, ] 962May ~l. ]904

Thpsp studies do not include cal('1!lations of cHvirlp.nds,taxes or commissions.

TIESULTS 125

If Tri-Continental common stock had been bought on Sept.19, UH2 and heldcontlnuously until May 3, 19G4, the profitwould have been 46 points or 4,600%. A $1,000. investmentin TY common, continuously held during that 22 year period,would have grown to $47,000. .

If Tri-Continentnl common stock had been trudedlong andshort, acconling to the Haller Theory signals ouring thatsame 22 year period, the proHt would have been 90.39 pointsor 9,039%.

By following the Haller Theory signals, buying and sellingshort, and re-investing capital gains, the $1,000. investmentwould have grown to $190,529. by May 3, 1964.

During the 22 year period there would have been onlyone small loss amounting to 3.15%.

If Tri-Continental common stock had been hought on Dec.24, ] 961 and held continuously until May 3, 1964, the actionwould have produced a loss of 10%.

Tf TY common stock had been traded long and short, ac-cording to the Haller Theory signals, with re-investment ofcapital gains, from Dec. 24, 1961 to May 3, 1964, the actionwould have produced a profit of 78%.

lZ() nESULTS

"\'nl-(;OiYTlNFNTAI, 'V,\I1I1ANTS

_Typr> ,,[ Signal nat" Prie" l'roflt r .oss C"l'ila,-

Trnnd Btl)' Signal S"pL In. 1n42 ,OOZ;, $ 1.000,

Trelld Sf·11 Signal Inly 27, i'HO 4,2S 4.1R7~ 0 oR,nOO,

Boltom IIny Signal 0,,1. 1'1, 1!l4G 2,O3 1.(,2 0 D:1,'lOR,

Top S,,11 Signal April R, IDGO 12.50 D,H7 0 ,11n,OG3,

Bol\om I\n)' Signal Nov, 2'5, 1<)'57 13.GO 0 1,00 411',:\78,

Top s"lI Sipnal Ang, 111, 10'"i9 2R.2,r:; 14,75 0 R;,7,fl90,

Trend illly'Signal Jan, D, InG! 25,,50 2,75 0 \Hfl.fJR0,

Top S"ll Signal .1)(1",2,1, lnG! 41.00 1R.;'O 0 ] ,G?,:i,(12R.

Bonom I\n)' Signal Jllne 25, j902 20.25 17,75 0 2,27X,731.

TIr>cent Price May 3, ID!34 37.03 11.3R 0 3,2G7,700,

Tolals RO.SO 1.00

If Tri -Contin~111 al warrants had 1H'f'1l lion ght on Sept. 19,J 942 and hdd continuously until 1\1ay 3, ] 964, th~ profitwOllld hflVP been 37,;-'7 points or GO,lOO%. A $1.000. invest-ment in TY warrants. continuously hdd (lming lhnt 22, vear

periocl, would have grow'n to $602.000.If Tri-Continental wmrants had been tmd~cllong nIHl ~hnrt,

according to the TT~lkr Theory signflls during tlwt S::tHlP 22year period, there wonld have been many profits and onesmall loss, which adcl up to 80.80 points or 129,250%.

Bv following tlw TTfll!0l' Theorv signnls, Imving and sdlingshOJ~t ~nd l'e-i~vesting capital g~ins, the $l,OOOc, invpslmentwould have gmwn to $:~.267,700. hy }.lfly 3, JQG4.

Dnring tlw 22 year ppriod there would have IJPf'n only onesmall lo~s amOllllting to R%. Tb« sblrling price of .Ooc:~;)is

equal to 111 (\ thoIf Tri-Conlincntal warrants l1ad 1)('('11 honghl on Dcc. 24,

] 961 nnd hdd conHnnously until M fly 3, H)G4, thp ;ldion

would have prOd1H'f'd n loss of 141/:>%

If TY wnr;ants h::Hl hN'J1 tra(led long nncl shorl, wilh cnpi-tal gnins rpinvested, from Dec. 24, 1961 to May 3. ] 964, ac-cording to the Hfll1f'r Theory signals, the action wonlcl have

prodl1Cccl a proflt of 101%.

I1F$ULTS 127

Fol.lowin~ is a list of some well known hln« chip stocks,showmg pnce eh::mges and total results for trading with theHaller Theory signals. All stock prices have been acljuste(l forstock splits. "P" stands for profit. "1..." stands for loss.

1311)'SellBuySenBnySenBuySellBuy••

AmericanCan Dl1 Pont

Price PorLPorI.. Price

Sept. W, I!H2,J uly 27, ] 94flOct. 14, 194HApril S, 19.58Nov. 2,'), 1957Allg. Hl, 1959Jan. R, 19f1lDec. 24. ]961J line 2.'), ] 962May 3, 1964

16.752.'3.8120.5048.1337.6.'344.883.':;'50415.7541.2543.50

P 7.06P 3.31P27.63P 10.50P 7.25P 9.38P 10.2.5P 4,50P 2,2I5

PROFITS 82,13T.OSSF.S 0

NET PROFITS 82.13

490% Profit

e Recent Price

28.5052.504.').00

235.25174.00268.50192.00241.00172.00258.00

P 24.00p 7.50P 100.25P 61.25p 94.50P 76.50p 49,00P 69.00P 86.00

658.00o

658.00

2,310% Profit

128 RESULTS

If an investment had been held continuously inCan durinj- the 22 year period, :1 profit of 160% Wresult (')(1. '

Buying and sdling short, during the same 22 yeaccording to the Haller Theory signals, would have,'1I11mCTOIIS gains which add up to H total profit of 4out re-investing capital gains. There were no losses"

If American Can had heen bought on Aug. 16,'held for more than four years until May 3, 1964,rnenr 'would have shown a small loss.

If American Om had been traded long and sAug. 16,1859 to May 3,1864, according to the Hallsign::!ls, the Four profitable trades would have shogain of 26.38 points, which is equal to 58% profit:

.:J

A 9.2 year continuous investment in Du Pontshown a profit of 805%.

Buying and seJling short, according to the Hallsignals, during the same 22 year period would havenumerous gains resulting in a total profit of 2,310re-investing capital gains. There were no losses,

If D11 Pont had hpcn hought on Nov. 25, 1957continuously for almost five years un til June 25, 1vestment would have shown a small loss.

If Du Pont kHl bpf'l1 traded, long and short, fro1957 to Tune 2.1), 1962, ;:l('ronling to the Haller Theathe four profltahlc tnnles would have shown a tot289.00 points, which is equal to 166% profit. . ,

If Du P(,nt had been· traded only long (wltI1'snles ) during that same period, t11e two trades W143!'iO points or 83% profit,"

RESULTS 129

General GeneralElectric Motors

Price PorL Price PorL

Sept. lfJ, 1942 8.83 6.25July 27, 1946 15.54 P 6.71 .l0.87 P 4.62Oct 14, 1946 12.67 P 2.87 8.50 P 2.37April 8, 1956 63.00 P50.33 . 45.13 P 36.6.'3Nov. 25. 1957 60.88 P 2.12 36.63 P 8.50Aug. 16, 1959 81.50 P20.62 5.5.00 P 18.37Jan. 9, 1961 72.75 P 8.75 42.00 P 13.00Dec. 24, 1961 74.38 P 1.63 55.75 P 13.75June 2.'), 1962 57.38 P 17.00 46.13 P 9.62May 3, 1964 &'3.00 P25.62 87.88 P41.75-- --

PROFITS 135.65 148.61LOSSES 0 0-- --

, NET PROFITS 135.65 148.61

1,536% Profit 2,377% Profit

e figures in these studies do not include calculations ofI dividends, commissions or re-investment of capital

TIF.SULTS RESULTS 131

If an investment had heeri hcld oontinnously ill CeneralElectric during the 22 ),ear period, there would have heen aprofit of R40%.

Buying and selling short", rluring the same 22 year perirxl,according to the Haller Theory signflls, would have producednumerous gains which F1dd up to a total profit of 1,5.'36%.There were no losses.

If General ElectriC' had !lccn bought on Nov. 2,5, 1957 findheld COlllinucusly for almost five years until june 25. 1062,the investment would Ira \,P shown a small loss.

If GF hart I)('PlI tn:Hled long and short from N ov. 25. 19:'7to [nne 25, 1962 according to the Haller Theory signflls. thef01;r prolltnble trades w0l11d have shown a total gain of 48points, which is eqll::l1 to 79% profit.

Standard OilGoodyear Tire of New Jersey

Price PorI.. Price PorI..

Buy Sept. 19, Hl42 1.70 6.56Sell July 27, 1946 5.29 P 3.59 12.87 P 6.31Buy Oct 14, 1946 4.45 P .84 11.16 P 1,71Sell April R 1956 24.33 P 19.88 62.13 P 50.97Buy Nov. 25, 1957 26.42 I.. 2.09 49.50 P 12.63Sell Aug. 16, 1959 44.87 P 18.45 52.2.5 P 2.75BllY Jan. 9, 1961 36,00 p 8.87 42.50 P 9.75Sell De~. 24, HJ61 4.3.00 P 7.00 50.75 P 8.25BII)' Jllne 25, 19G2 31.00 P 12.00 4U.00 P 1.75

e r.,1ay 3, 1964 41.87 P 10.87 87.2.5 P38.25_ ... ~ --PROFITS 81.50 132.37I,OSSES -2.09 0-- --NET PROFITS 79.41 132.37

4,671% Profit 2,018% Profite Recent Price

A 22 year conf inuous investment in Conernl Motors wouldhave ~h~l\vna profit of 1,:106%.

Buying and ~elling short, during the S::l1lH' 22 year pf'riod,according fa the Haller Theory sign::lls, would have producednumerous gains, which nrld up to a total profit of 2,377%.There wore no losses.

If GM llad heen hOllght on April A, 10.56 and held for sixyears unt il June 25, ]862. the investment would hnve sho'."11a gain of one point or 21f,.

If Gl'f had lieen trarlf'd long and short, [lC'conJing tn theHaller Theory, dnring thnt same pf'rinrl, the five prnfitahletrnrles wonlr] hnvr- shown n total gain of 6~.24 points whiehis eqllfJl to 140% profit.

RESULTS RESULTS 133

Texaco U. S. Steel

Price PorL Price PorL

Buy Sept. 19, 1942 4.47 7.68Sell July 27, 1946 8.00 P 3.53 14.50 P 6.82

Buy Oct. 14, 1946 7.33 P .67 11.46 P 3.04

Sell April 8, 1956 33.50 P 26.17 60.00 P 48.54

Buy Nov. 25, 1957 30.87 P 2.63 55.00 P 5.00

Sell Aug. 16, 1959 43.00 P 12.13 100.50 P 45.50

Buy Jan. 9, 1961 42.00 P 1.00 79.50 P 21.00

Sell Dec. 24, 1961 56.00 P 14.00 78.00 L 1.50

Buy June 2.5, 1962 48.00 P 8.00 43.13 P 34.87I/> Mav 3, 1964 78.87 P 30.87 55.38 P 12.2.'5

-- --PROFITS 99.00 177.02l.OSSES 0 -1.50

--- --NET PROFITS 99.00 175.52

2,216% Profit 2,285% Profit

" Il ecen t Pri ce

If an investment llflfl been held continuously in GoodyearTire during the 22 year period, there would have heen aprofit of 2,363%.

B1J)Jing and selling short, dnring the same 22 year period,according to the Haller Theory signals, would have producednumerous gains and one loss resulting in a total profit of

4,671%.If Goodyear had heen bought on Aug. 16, 1959 and held

continnously for more than four years until May 3, J 964, theinvestment would have shown a loss of 6.7%.

If Goodyear had heen traded long and short from Ang. 16,1m')!) to May 3, 1964 nccording to the Haller Theory signals,the four trades would have shown a total profit of R6%.

If Coodvear had he en traded only long (with no shortsales) during that same period, the two trades would haveshown a profit of 39.8%.

A 22 year continuol1s investment in Standard Oil of NewJersey would have shown a profit of 1,230%.

Buying and selling short, accordin~ to the Haller Theorysign:lls, durinj; the same 22 year ppriod would hnve producedm~ll1p.rousgains resulting in a tot:ll profit of 2,018%. Therewere no losses.

If Standard of Jersey had been 1l0ught on Nov. 2.;', 1!}i)7and lwld continn;mslv for almost five" years until June 25,19(;2. the investment "vould have shown a small loss.

1f Standnnl of Jersf'Y had been traded, long and short, ac-cording to the Ihller Theory signals fluring that same period,the f01;r trades w0111dhave shown a total profit of 45.5%.

If an investment had been held continuously in Texacoduring the 22 year period, there would have been a profit of1,665%.

Buying and selling short, eluring the same 22 year period,according to the Haller Theory signals, would have producednumerous ~ains which add up to a total of 2,216% profit.There were no losses.

A 22 year continuous investment in U.S. Steel would haveshown a profit of 621%.

Buying and selling short, according to the HaUer Theorysignals, during the same 22 year period, would have producednumerous gains and one small loss which add up to a totalprofit of 2,285%.

If U.S. Steel had heen bought at the bottom of the hear

nESIJLTS]34111:1rl«'1011Nov. 25, 19!'J7 rllld held c01tfil111011Sh,lor 11l0l"('Ih:l11six )'cars until May 3, HlG4, the invpslnw;lf wonlr] hnvoshown a profit or less tlum half a point.

If U.S. Slpd had 1)('011Irnded, '()1l~~rind short, :wcordingto tIl(' Tbll('r Theorv sign:ds dnring fhal same period or moreIh:111six vr-nrs, tho nvp tr:Hlcs woulc] h:l\1c shown :I 101:11j~ainof Jl2 ':ipoints, which is c<jll:ll 10 2(H"{'.

If H,S. Stcel had l)('clI lraded only 011 Ill(' IOllg side (withno shod sales) dming that same pPrior] or more 111;111sixV0:11'S ,lie thr0(' IOIl[Y(r:1<10Swould h:n'(' shown r1 profl( or!J(;.25'poinfs, which i~'f'qlJ:l1 to 102%.

CTJt\PTrm 12

VARfOlfS ,VAYS TO USE THE TJIEORY

An important item 10 conskler, in addition to the liuv nnds"l1 sigll:lls or the Huller Theory, is the general market k;w\",l-edge on whic-h the theory is hased, That knowledge f'nahlcsus 10 ;lIwlyzf' 'he slof'k market anr] understand rhe market ac-tion at :111)' time. An 111Hlcrstanding of volume, yield, pricf'1ll0V01llr11t. the' A &: n Inrlex anr] the NH-NL Index shouk]cn:lhlc one 10 \(>11 :It n glnnel') what is taking pbcf' in fhl')market.

In the Chart Hr-vir-w chapter are many n~pdilions or ('pr-rain antinns h('(':ll1s(, al1 h1l11markets and hear markets whichoccurred in '11(' last twenty-two years have h~ld remarknhlesimila riries.

1'11(' first pll:1s(, of ('v(,1''' Imll mnrl«- has hp.cn a strong.smooth 11]1"':1n1 movement arr-ompanied lly inrrpnspd vol-limp. amI inr1'f'nsrr! new highs. Lnrgc rene-lions have (r('-quently pn<!ed 111" first phase. At the tops of fh(' lmll marketshave lIsn:dly appeared wide swinging reactions, dpcrensedvolume anr] [pwer lWW highs, -

During most of Ill(' hear 111:1r1<('I,.;there hnve I>('pn largerallies, some of which wcrp fn]sl') moves of the DJTA. Dmingthe crashes tho action was nSl1:111ysimilar with smooth, sharpmovements downward. accompanied hy large volume, Sell-ing climaxes have hePD very similar in their ndioD. Low vo]-ume was present at the bottom of every hear market.

135

VAHIOUS WAYS TO ~JSF. TTIE TlIF.OIlY

Of r-oursc, evpry hl111market and every hcnr m.rrkr-t isslizhtlv (]ifrcrcnl from lIle others, 1 have never seen two

t, "which were f'x:1ctly alike. Dill the renwrknhlc consis!rncy ofthe similflrities makes it relatively simple'. to nnalvzc tl)(' stockmarket when one possessps !lw rp(l'Jired knowledge. It is awonderfnl reeling to he n11k to correctly nnnlvze the fldioll ofthe market find nnderstnnd Ill(' signif]canr(' or each faclor asit appears on t1H~scene.

When vnn wish to nnnlvzo the market. a('cnrcling to th('HaHN Tl;('nry, yon might ~01Tlpan~the current market actionwith simiLn' action on the charts ill this hook. Thnn rp~1clwhatis saiel flhout that action in Ihe Chart Review chaptor. SoonYOl1should he able to make an accnratr~ analysis wi thnnf" .rderpncp tn the text.

\V1H'n 1 make an nnalvsis, I stflrt (lff with thoughls likethis: "I will not form an ~pini(ln ahol1t tllf' mnrkr-I, find Twillnot consider 1110opinions of others. J will hp neither optimis-tif>or pes~imistic. J will only ('onsider fads. as interpreted bythe Haller Theory."

I wonld not wish to sav thlt evervonp ill the market shouldstridl" follow evrry mfe :lncl sigt;:ll of Ill(' Haller Theory.Some imTp,tors lnrv s!o(·ks pnly for divi(],.nd income. Othershl1Y storks only for eflpilfll gflin. Some :lrp swing Ir:1(l('rs,some nre short tC'rm hndprs. nnd some m'C'jllst plain gflm-hlors.

Mnnv i1Tvp,<;!orsdo not wnnt 10 sell s!Jnr! llwlp1' any dr-011msfn'n('('s. n11(l 'hnt is !h('ir pri\'ilpgc~. F'vr-rvonr: should havehis own J,nsi(~pl'ogmm to en it his rflr!irll1:ll' I"sl('s nml nhjoc-

tivp~.\\'h:1t 1 \\'ish to poinl out is \11:1\ :11most anvone ill!p1'PS!f'ct

;11 thr, slo,.l, m:lrkf'! might hpneRI from :1 knowkdge of tllPHaller Tl.oory find th" fad'; nn whiel, it is hasC'cl. F,,"'n if nperson d;r1 not wish to follow any of Ihp signflls, an llndpr-

stamlini! nf yield, volume, A & D [ailuro and the selling eli-

VAm01JS 'VAYS TO USE TIlE THEOHY

max sho"ld help him to form intelligent conclusions, basedon fads. .

For theInvestor who may he detpnnined to huy only thehighest rplality stor-ks, and hold them for the rest of his life,n knowlAclge of tl10 Haller Theory might help him to buynear thAbottom, anr] avoid huying near the top. For instance,almost any long term investor would have found it prudent,in tlw past, to avoid hn)'ing after the A & D Index had a[allure with a vidd of lpss than 4%.

The BoHon'; Bu)' Signals. in thp past, have ir1fmtificd out-sl:lnding hu)'ing opportunities which would have heen ex-trernr.ly profitable, f'ven if the long term investor had notfollmved any other part of the theory.

A knowledge of the Haller Theory might also hpnpfit thAinvestor who is onlv in!erAsted in huying growth stocks, andholding them for J1l:lny years. With an understanding of hulland hear markets, such an investor might improve his resultshy flvoiding purchases when the market is in a dangerous toparea. Even growth stocks can suffer large rledines in a stockmarket crash.

To illustrate tlw point. let us pX~lTniTlethe rf'eent history ofIBM, which m:my l)eor1f~silid was the greatpst growth stockof :lll time. Tn November, 1961 IBM re:lched a price of $600.JJPr slinr«. Thcn it d('r!in('d dra.,tirn lIy in the crash of 1962.The lowest point of it., dedine was in"June, 1962 when IBMsold :It $:100. pN sharr-a decline of r50% from its high. ByNnv('mlwr 17. Hl6.1 IBM sold flt $485. per share. .

Those who hotlght IB1\1. the world's great('st growth stock,in November. 19R1 :mrl h('ld it for two years until Novemher,Im~~had only lossos to show for tlwir "trollhle. If an investorh:Hl sold IBT\l at thp Top Sf'll Signal of Decemher. 19f1l andI1H'nhonght it hnck ilt tll(' RotlO111Buv Signal of [nne, Hl62,he w01l1rl hflve J1l:lrle a good profit "during thflt two vearpprio(l.

v A HHHT~ ,V A YS TO 11SF: '1'1IE TTTF.onV

If an investor wish", 10 1:lkp ad\,;IIl';l~;f' of \hl' low prirr-snear the holtom of a lienr market, he can not remain fnllyinvestr-rl lhnmgh a major marker rlor-lino. Tlw pf'fson who re-mains fnll.1' invested lias no capitfll availahlf' to I)\]y near thebottom.

1'111" swing trader might want to follow 11lf' hny nm] scllsigmtls as closely as possihle' to take fllll :ldv:1lltagp. of tlte up:u;d down movements of !ltt""'market,

If a pf'rson felt tJwt tJIP nsf' of 111('Top Sf'JI SignnJ rf'qllirf'(1too much dfort or was too dirnclilt to uurlerxtnnr], llC mightr-onsirlr-r nsing jllSt tlw Trend Signals ancl the Bottom BuySignals 10 Jwlp him dccide when to huv or sell.

Thf' investor who dops nn! believe in any kind of contrarvaction, and wants to Follow on 1)' w('1I-;stahlis1wd trends,mig11t prpff'r to IlSP only t Iw Trend Signals.

A knowlf·r1ge of Ill(' Tl:dlr'r Theory woulcl hf' valllal11(' toeorpor:11f' f'x('Clltivps wllo might wish to raise f'apit:'d hy offf'r-ing a nr-vv st ook issue to tl\(' pnhlif'. Npw iSSllPS do 110t sPlIvery well during hear markets, and it is n waste of f'orrorntpfllnds to attempt to sPlI a n8W iSS1J(~during a S8Vf'rf' marketdedine. TIl(' astute r-xooutive could uso a lmowlf'dgfl of mar-kf't nnnlvsis to O{ff'r his II('W issue near tile top of a bnl] mar-ket w11('~1pnhJie f'TltJllIsi:lsrn and optimism is fit its height.

TIl(' financial t vooon miVhl do w('11 to think nhoTlt hnl] nodhem mnrkf'ls ill ;'elalion In his ncqn ist ion progrnllls. When atvcoon nftf'mp!s to gnin ronl rnl of n oorpornt lon, 11(' 11111Slf;'f'rpll'nt1v huv J::lri!e amounts of thaI oorporatton's stock inthe Op('11 mnrkr-t to :1ehlev'" his ohjrctivp. Frr-qur-nl lv th.pamount of mrnu-v reqllirrrl is so grf':lf that 11f' may find ItlH~Cf'SS;'HVto horrow l:lr~~pnmouut s of 1ll01l8Yin onl"r 10 COI1-

H11118hi.s nrogram.If h!" sho1l1(1 starl sm·ll an aggrf'ssi"p program, nnd streich

llis crf'dil tn Ihf' limit right :1\ the Hmr- whf'll a l)('ar market issbHling. he would '1SS1'1111('trpmpndolls risks. \i\JIlPn a henr

V" HTOos w AYS TO nSF: TTlF: TTTF.OnV 139mnrkef C:ll1SPSstock pri('f'S tn dr clinc, Ill(' hankers who mighthnvo loaned him money, would require additional f'ollateralto protf'd their loans.

If the tycnon hns strf'tcher! his resources 10 the point wherehr~can not provir]r- tllP relpJinxl collateral, the bankers wouldhavp to sPlI thp s~od< or oflwr :1sspfs which he Iwcl plr>dgf'cl onthf' loans, Sllch :wHon might result in a loss of millions ofdollars (0 lltf' lvr-nnn,

The well-in(orJ1lPd ~'yf'oon who can idf'ntify stock marketlrends m;gh~ !lr>hr>Hf'r ofF ~o deb)' the start of an nggressh'eacqnisition progrnm lln~iI n hoar market has nm i~s course,'Vhen a new 111111nmrkr-I stnrts, the possihility of Tp.cp;vingmargin ca lis is milch Ipss than it won 1<1lJp at th" start of ahear rnnrkr t. Also the f'ost of acqtrisition miP-".ht 1)(>11111('hless,

.. l"'

lH'f'allsP til(' prief' of thp stock might hI" lower.The short tprlll lr:tcler might lIS£-'the concepts of fhp ITaller

Theory 10 help him initinlp his trades in accordance with thetrend of ~hp stor-k markr-t. npst rpslll!s am usnally obtainedwhen only Jong posltlnns are initiated dnring a hull market,and short positions nr~ established dming a hear market. Seil-ing short in :1 [iul] market is a clangenms venture.

',Vhilc Wf' are on thr sllhj('d, ilmight hf' interesting to rlis-f'llSS SOIllP of tIl(' ;Jd\'nntages and disndvantnges of short sell-ini-(. TJlp main mlvantngr is ihn.t SllOft selling is a practicewhich offen; the possihilily of itlf'rensing one's ('arit;JJ duringa lx-ar market,

TllP main disa1lvnnt[lgf's are thnt a short position dnr~s noth:n'p tltp possihililv of rf':llizing as largfl a profit ns a longposition, and Ihp pPTson with a short position risks a largerpotential Joss than one with a long position. It is a case ofsimple mathematics.

The pf'r.son wit l; a short position can not possilily makemorr- than 100% profit on a short sale (without trading on1l)<lrgin), IWf';IllSP a stocK can not decline more than 100%.

vxnrorrs WAYS TO USF; TIm THEORY

Then' is no limit to how much a stock can rise, so it is possi-hIe for a person with a long position to n~aliz(' a profit of500% or even 11,000% or more. Since there is no limit to howmuch a stock can rise, thf' sllOrt seller risks the possihility ofan unlimited loss which could amount to much more thanthe oril!irwl invf'st!mmt.

,'\

Another disadvantage of short selling is the income taxtreatment. PIORtahle short sales can not he tre::lted as longtenn cnpital gnins. regardless of how Inng the short positionis held. Even if one should maintain a profltahle short posi-tion for a ye::lr or longer, it would still he a short term capital

gain.Despite the rlisadv:1lltnQ/~s,many aggressive investors sell

short in an ::lttempt to make profits in a hear market. Somepeople treat short sales differently than long positions. If Isell short, J do not like to trade on mnrgin (horrowedmoney). nncl T nm not anxious to put all my resources into ashort position. When J initiate what appears to he a goodlong position, T sometimes put all my resomces into it, nndthen huy on full margin.

Manv conservative investors do not even consider shortsales. 'i'heir ohjective, in a hear market, is to protect andpreser,,!' their capital. To accomplish that, one might put hiscapila1 into governmcnt homls or govemment insured SAV-

ings accounts until the next huying opportunity appears.One could nlso follow fI comhination of progrmns in A hear

market. He might make fl small short sale v..rhile keeping thebulk of his cal~ital in govemmp,nt insnn,(l s:wings.

J helieve that small investors con 1(1l)('nel1t much from akno\:vleclge of fhe IT:111erThe0T)" The heginners and the smallinvestors are frrqucntlv confused hy all the conflicting adviceand opinions with which they fire rleluged from all sides,'\Vhen S1Ifficiently confuspcl, the normal person USllally takesthe wrong action, or none at all. Such a course may he f'xpen-

v Anrons WAYS TO lJSE THE TIIEORY

sive, Adequate kJl0wleclge could 1]1"]1'the small investor toprotect his capital from severe losses during bear markets,and to increase his capital rlming hull markets.

T~lmy own case, J place great value on the peace of mindwhich my thr-ory has hrought to me. Tnever worry about thestock market any more, for now I seem to unr1e;stand whatthe mnrk of is doing at flll times. Tknow how to recognize dan-ger?l~S fop areas, and J can also recognize the huying oppor-tunities when tlll')' appear.

enAPTER ].')

1() ()% PRO FIT TN F o IJ It ]\110 NTH S

Now th~t yOIl have rend many pngm; ahout theory andlogic and tl1f'orelicnl trades, YOll may he wonrlf'ring whetherthe Haller Theorv hns ever heen used in real ]ife with cold,lwrrl ['aS11at stnk;:. Yon 1I1ftyalso he \vom]pring wllPlhf'r sllchnctual use of the theory was profirnhle,

Thp answer is th:lt 1 have nsed the Haller Theory in artllaltrading, and ils use has been profitable to me. Iv1)' invest-ments'in the slock market have lwen much more profifahlesince I started lIsing tlw theory.

Dllring the HJG·) hull market, my lise of tbe l Inller Theoryennhlrd me to realize actual cash profits which increased thetol:1111et value of rnv stock acconnt hy 100% in Iour month».Iwill use my most r~cellt trades to ilInstrnte the nctl1~lllSe oftl](' theory.

Plp:lse do not think that I mention thf'se trarlcs with theintnnlinn ()f hOflsting. The fact is that I would ratller no!divldl1,C tllc ddnils ;;r Illy trading nr-I ivit iex, h11t T fed it isnece;sary to give:m actllnl example of how tllP TTalJpr Theorycan lldp to make monr-v in the market.

V~lr1Vin Septrrnlwr, HJ6.3 some cnpif:d was nvailahle, and 1(If'ridp;l to invest it in the stock market. T already had longpositinns in stocks which l1ad been hnught em-lier in tIl(' hullmarket.

AI that time the TTnJJer Theory indicate(l tll:1t tIle 1qGl hult

100% T'HOFIT IN r'oun MONTHS

market was ',I ill in progress, with 110 end in sight. Thorr: hadheen a large reaction in Jnne and JIIly, which lI1arkrd the endof HIP strong, early phase of the hull market.

My analysis of early September was that 1110market was inthe phase o[ wide swinging reactions, which usnally turnsout to he a lop area, There had 110t yet been :1 Failure of theA & D Index, so then~ was no definite sign of when the hullmarket might end.

When the m:11'k('t is in a possible top area, one can not ex-pect to make a profit hy huying just any stock. for the major-ity of stocks nsn:dly decline in a top area. Gre<lt caution isrequired wlren huying stocks at such a time.

1 decided tlwt the stock I would buy would have to be oneof the strongest stock,.; in the market. My technical strengthstudies fit Ikif. time showed the Airlines to hI" the strongestindustry gro11p in the market. A earcflll stndy showed thatthe strongest issue in thf' Airline group was Trans 'Vorl<1 Air-line warrants Au examination of [unclamentals reVf~aled th:1tTV.' A ancl 111:1ny ot11f'r airlines were enjoying- gwatly in-creased c::trnin,gs in 1963.

I dpcidrd to 'iHlY T\VA warrants hecause it was the strong-est issue in thp strnngrst group, and the fnndmnental outlookwas 'Illite [nvorahl«. T was also influenced hy the fact: thatT\V A is a large company whose name is known over much ofthe world.

T did not want to risk llllying- T\V A warrants at thr highestpoint of n rnllv, so T rnterrd an order to hny at a price of $10.per share. That pdce wa.,1,1% helow the high for the year,which was 11 %. I Jikr the idea of hllying a rapidly risingstock when it has 11 reaction and sells at least 10% below itshighest prirf~ during the rise.

1\1y order was executed on September 17, 196,'3, and Ibought T\V A warrants on 50% margin at a pric(' of J O.

Mnoh to mv surprise and irritation, T\VA warrants con-

J 44 H10% p!1rWlT TN FOUn l\!ONTIIS

tin1lcd the (]pelin r-, YVilhin two weeks nner 111Y pllrchnsf', thevhad t01wlHd a low (1f IW~.'l"1Inl low pdp" was hr-low IllP spnlat which one wonld normally place a stop loss order. If Lhndused a slop order, 1 would have been stopped oul 'with a loss

on that decline.At the low of ~Wt. TV/ A warrants had declined nhont 1R%

from my purchnse price. On 50% mnr~in, the pnJwr loss was36%. Add nuothe!' 4% for commissions and interest, find thetotal pnlwr loss was nhout Ml% of the cnpital invested in thattrade. T wasn't pXflC'tly lml1hling over 'with joy. A time likethat, wlwn things go ~v1'Ong, is when n fellow IlPec1s a theory

to help him out.The Haller Theorv, at that time, still showpd the 111l11mar-

kct to lw going slro;lg. with no pud in sight. T decided that Iwould not he frightened out of my position as long as thehull nwrkf't was in progress. I reasoned that T\VA wnrrantswere more volatile Ihm'; T hnc1 figmed. fwd therefore suhiedto lnrger rend ions rhan lr-ss volatilp isslles. 1 fignrcd they

would stnrt going np ngnin soon.My rf'asoning and my dpdsion proved to he r-orrect, for

jllst n frVl clay~ lalcr. T'V A 'warrants had. snapped h~('k, an~1were splling ahovr 10. Tlw 3dvance contmued slen(hly untilhte in October, wlWll tlw price reachp!l 13. By then TWAw~rnmt~ hildlH'rnme one of the most ilf'tively In1(1('(1 iSSl1eson the ATIleric;t.n Stnck F,y,'h;t.nge. At a price of 13, TIlVpaperprofit was nrol111(15S% of the capital illvest('(1 in !klt Ir3:1P.

On 11)(' day wl1Pn TVIl A warrants ff'flclwll 13 on very l~lghvolume, T was a lillIe thrillp(l and excit("(l. T was not cxcltedhecal1sp. of the lSond paper profit, for T had experienced otherlnrge profits. It w~s 11e('a1lse I realized that T harl a tiger hythe tail, ;1n(1I knew exnetlv wlint Thad to do n1>0111it.

On the dav when I s~w that T\VA warrants had thestrength to h:C'mnp an outstanding high flyer, J felt thnt 1 hadto eXCCllte one of the most potentially profitahle manel1vers

100% PIlOFIT TN FOUR MONTHS 145

III Ihe stock market. 1 would add to TIly profitable position.The maneuver is sometimes called pyramiding.

T decided to Pl1t all my resources into TWA warrants. Thenext moming 1 l("h~phoned my broker and placed an order to~pJlI1lY other stocks and buy more 1"'" A warrants at 12th on:50% margin, using all the pmcllflsing power at my command.I had a positive jrpJing that the warrants would rise to 18

and double my monev., "

My order was executed on Novemher 1, and I loaded up011 the warrants at 12th. Every dollar I could scrape up-allmy liquid assets were in T\V A warrants.

At that lime the Haller Theory still indicated there was noend in sight for the h1l11 market. Bnt the first signs of weak-ness had occurred \•...I1!'m divergence appeared on the scene.Dming several weeks in September and Octoher the DJTAhfld risen to new highs while the A & n Index failed to makenew highs. Divergence is a sign that the majority of stocksnre not rising along with the DJTA. Such divprgence Fre-qnently appelll'S in the top area of a bull market.

T realized that my purchase price of 12th was less than 10%hnlow thn high of 13%, and that I was hll)'ing ton close tothnl high. I did it that way because I simply could not standtIl(' thollght of missing the move by trying for a lower price.Several years prpviously J had missed a large part of a hullmarket in soyhenns hy trying to hlly on a reaction whichlwvpr nppenred. Then Thad tn chase the soybeans and buy ata much highf'r pricp to gpt in on the bull move. It was a Irus-

trn!ing experience.Then it happened again. A ff~w weeks after my purchase at

J 2%, TvVA wan-ants went into a reaction that carried themdown to ] 07/1'1. If T hnd used a stop loss order, I would havehe('n stopped out on that decline. That reaction did not hotherme much at nil, for I had alrc3dy decided to maintain my long

lOOt?{, "\lOFI'!' IN Hlll\l !\10NTIIS

po<;iliolllilllil [ h:nl :1 larg(' profit or:l l l nllr-r '1'lwory sell stg~\11;JI ()('ell r rcd.

'I'hr-n th(' slo(llp;nlel WClIt inl o fl p:mie whr-u PresidentKf'l1Jwdy was ;Jss~ssin:lt('d ill N(l\'C'lllIJPr. T W:1Sshocked anti",nrri('(L lik(~ oll)('r. investors, B"t T did not ('OIlsider sellingon! ll('c:lIls(~ 1 \\,:lS dpter1l1ilH'd to wait for a sell signal. I alsO'knew [rom mv rese:Hch Ihal a sllddell shock h"rl1H'vcr hcm.tahk 10 ('lid a J,1l11markC'!- dllrinf': tl)(' Insl twelltv-two yelU1~

\VIH'lI lho panic ended nnrl Ille stock market sl:nled moy"~ill'; np :l~~ain, '1'\V1\ warrants nlso rcslllll('d the npwnrt] mov~nlld I,e(':lll](' Ille second most ndivc isslle Oil the American'

Stor'k K'I·h:mge.Oil .l:lllllary 18, Hl(l/! T solrl all/lw T\V;\ warranls al 17% ~

(':1lIS" Tfell Ih:1! tlw 111111market \\,:IS approaching nil importantclimax of speclllativp ar-t ivitv al 111:11t imc. ThaI ide:\ was corfn'd. for manv fast moving' slocksmade Ihoir highs aroun~J:1111ln1'ylS. High flVHS like Sylltex, i\T:v·l,('v Airlines, Dcnnt~:SO" 1\lallllfactming nml Dvmo Il1dlls1rips t(~pppd 0111and di4no! approach t lioso highs again d"rillg tIl(' next six montbi~j'lf!

g,,1 my s~dr of T\VA warrants W:1S a mistake. Aftrr declinin~to lG, thov s{:lr(l·d ri<;ing again to finally rench a high of 3()W:1!Jont six '111on1h<;lnl<'r. ;rh~ Airlin« gro;lp was [ust 100 strOiilIn lop 0111in Jnll11:nv. . ,

1<:"('11!!Jn11f,:h , m:HIf' many mi<;!:t!,ps, mv proril was SUli)1slnnfia1. From Ill" nrigin:d p11rc!J;r<;('p1'j(·p or 10, T\VA wai~ranis rosc 7w;r, whilr- II)('ld thr-m l\lv profit 011Ihal parliculrii'~tr:1(I(' wns over ISf)";", 1Ir('n11Sr T wn<; lradin!( nil SO''?{, mflr~llmv('VI'{ nile <;honld no! phec Ion I11llch importance on thIj"P<;111fsnl any nur: l1'n<1p. The prime ronsider:ltion is wh~~happf'll<; In Ihe lotal net value of :1 persoll's nce(1l11ll. Stoc;1jlIm,!<r'1's rP[rr 10 it n<;thr ('redi! 1)~11:1I1C('or tll(' :1('('011111.

Tlw Th11er Tllf'orv had provided Ihf' gllidnnl'(' Ihal helpCllmr- to Inkr n('ln:d (':lsh p1'oflls which in('J"('n<;pcl Ill(' InIal ~vnllle of mv neeo11nl 1Iy 100% in thc lour mouth period rr~

100,,!,' 1'1l0FlT IN FOIIH l\f(lNTIISI/17

Seplrlllher 17 [r ) l:lllll:l1Y 1:~.I n <;hOlf. T h:ld dOlll,krl 1111111\

moucv with llO losses.Anothor inl('f"('slilll( rnd is Ihnl pvcry sloe!' T pllrckr<;ed in

l!)(.n was <;old al :l profit. The onlv rr-asou I h:ld hprn ahll' toavoid lo,<;ps 'vas h('I':III<;r (If mv el)llnclPl)('C in flIP l ln llr-rTheorv. '

Il ad 11Isl'r!<;I.np foss orcll'rs. 1 would have !H'1'1lsfopprd (l1]tnt Jr';)sl ,Im'(' 11111(',dllrimr, Hl(n, :1I1d mv Ir:ldf'<; miphl 1J;IVPshown n lwl lnss for Ill(' vr-n r. I hnvo l'lOl!Jilll( ngai;I.<;t ,loporders, 11II~ 1 do not liko 10 I1r stopped out with a IllSS dllrin~~It tcmpornrv re:1('fioll. T do not lise stop onlrrs vr-rv often hc-cause J Ihink T 11:1\"r sOllwtlting Iwlter--Ihe "alfe1' Theory.

Tt was a snti.<;fnclion to know tflat 1 Iwcl ohtained hrVf'profits hv following 111)' thenry and the' ic1p;l'; whi(,h T ha~l~cvel()prd all hv myself. TIl(' venture had he('n prrilolls altimes, hTlI Ilw TTnllPl' Theory llacl hc1pcc1ll1c 10 STlrvi\'r Ihrlarge reactions which mighl hflve heen disflsfrollS.

J had 1101pnirl nlfell!ioll 10 anyone's advicc nr opinion. norhad 1 he;ml PI' anvonr- rccommending Ille pllrcltase of T\V Awarrants. In fOd, , h:ld never hoard of T\V A wnrrnnts nnl ilmy slrcn,glh slmlics hroll~~hl tl1P111to my attention in HlG1.

Yon arc l1llfloTlhf('rllv 'vvOll(!Pring how 'my slTf'nrr,lh sln,ljcscan uncovorstoolcs which conlll Iweo1Tw hi~~h fivers. So 1 willdevote ('on.sidf'rnhle time, in I'nrt If of this il00"', to a rlf'\aikdexplnlla/iOll of 111f'1llf'Ihod T dflvc1o!wd In llelp me idenlifvthe slrongest stocks in fhf' market.

CHAPTER 14

'''fIAT ABOUT TIlE FIJTITRE?

I havp pff~selltf'd tlw story of how thp Hnller Theory hasworked in the past, in theoretical results, and in adunl lise.The adunl, n~allife examples were more profltahle than mostof the ,1wor{'ticf11trades.

NO'\' it is time for yOIl to wonder how the theory will workin the future. I wondmed th(' same thing about five years ago.It was grntifying to s('e the theory ::wcurately idf'nlify everymajor turn of the market, as it happened, during those five

years.The hig qnestion is, "How long can the Haller Theory go

on calling every turn with(mt a mistake?"W« must be realistic when we try to predict how accurate

the huy nnd sdl signn Is will he in the Future. To get the rightanswers, it is necessnry to get down to hnsio truth ancllogic.

The onlv nhsolllte certainties in our world nre in scientificfields rov~nxl hy the lwtmnllaws of physir's, chemistry andmatlwmfltics. For inst:l1lcf\ when a person jllmps from an air-plane, he can he certain thnt he will lie ]Jul1f'd down 10 earthhy the force of gravity. \Vf' can he certflin that every mole-cule of water r-ontains two atoms of hydrogen amI one atomof oxygen. We ran he certnin that fon~ plus [our will alwaysequal eight. V\Tecan he sure that malllPmatical, physical anrlchemica 1reactions will cOlltin11eto he the same in the Future.

In tl1f~stock market there can he no sure thing, for it is a

148

WHAT AHmn' nm FFTInm? 149

man-made Instif ut ion , motivated by human action, anrl snl»jpd to fluctuating conditions. Sinc~ tlw stock market is notgove11led bv th(' natural laws of science, its actions can nothe analyzed or predidcd with certainty, If a person demandsahsolute gunrantcl's when investing in the stock market, he isnot heing realistic, for there can only be prohahllities, not('('rIa in til'S.

To continue being realistic and lruthfu], it must be pointedou! that future accuracy of the Haller Theory is in the realmof probabilities. It has workr«] well in the past, and I helievethere is a prohahility that it will work well in the future. Hutthere can he no gl1~rnntee that any stock market theorv willwork as well in the future as it did in the past. '

A good record of performance can not guarantee a goodfuture performance, hut a poor past performance, on theother hand, would make good future performance improh-ahle. There is a probability that a method which has pro-duce(l good results in the past will produce better futureresults than a method which produced poor results in thepast.

When a person starts on an automobile trip, there is no cer-tainty that he will reach his destination alive. When a personstart~ walking across a busy street, there is no gnarantl'c thatlle WIll snfely reach the other side. There are elements of riskin all phases of am lives. only a few of \"hich can he entirelyeliminated.

Those are the fnds with whiC'h we must live, and i~ is IIp tous to do the hest we can with the uncertainties of 0111'en-vironment. As intelligent human beings, we should takemeasures to minimize the risks with which we are confronted.

The intelligent driver has developed driving habits and~Pthod~ which reduce the risks he m11Stface. By followinghis hahits nnr] methods, he increases the prohahilities of R

safe journey. The cautions pedestrian has developed a

WHAT AB0I1T 'nlE l'lTTlTl1E?

llwlhnd fnr rpr]llf'illg r!Jp risk of crossing a hlls)' .'lrpl'1. Sllchmf'lhorls I'an not compktph' c)jminatr fhr !Jnzarr1s, hut theyinerpasf' ,1l(' prnlwhililips of safely reaclJing a (Jr.s!in:ltion,

]'vly wn v of minimizing tllP risks in tl](' slock market was [ndovelop 'liP TTaJlpr Tlv-orv. Alt11011gli 111(' risks can nol 1)('eliminnlpd. 'lw Ihpop' 1I<'11's to increase the prohahility orsafely rp:1l'!Jin).'; my ohj(·(,ti\'p,

DlII'inf~ f1lP twr-nlv-rwo war period from J,l1l11nry, HH2 to]nlllwIT, lD(H, III(' TTallpr Thf'Ory achievr«] a rrconl of 100'?;,accuTIlcy-fl P'" ICnn;H)('f' ",hi(,h is fanla1di(-, T 1Jf'lieve it woulr]h". rnorr- rp::llislic to cXJ)Pct:l Futuro rCf'onl of g!')n{, [lecl1r[ley. TtUnk if is \visp to mnintnin n r-onservativo pxperfnney of £11-Imp rpsl11l". When f wns a hllilding contractor. T found it was,\ good policy 1o hp r-onsr-rvnt iv« when estimaling potcnlhl1profits, and w~nprolJS wlwu estim:Jling plTlenlial eosls.

PA RT II

"rrIE S'rRONGEST'

INTRODUCTION

The Slronw'st Stock Concept is an interesting subject,worthy of extf'llsivf' discussion. Ihad planned fa write a sepa-rate hook ahout it, hut after some serious consideration, Idecided to include in this hook a condensed summary of theStrongest Stock Concept. .I felt it was important to avoid delay in tf'lJing you ahout

fhis concept lwcnll.se tlwre is a chance that a knowledge ofhow to idf'lIlify the strongest stocks might possibly help yOll

to mnke some Inr,ge profits. If yOll have traded ill the stockmarket for all)' If'ngth of time, you know that one good ideacOl1ldhe worll1 thonsnnds of dollars.

There is also a possihilily that one or more of the l1J1IlS1Wlideas prcsenlpd hen~ in ParI IT might help )'01110 avoid Inrgelosses. One Iiflk~ mistake in tl)(' slock market can cost thou-sands of clollnrs. Therefore, T will reveal some of my ideasand mistakes in connection with the strongest stocks.I have userl fhl' Strongest Stock Concept ill comhination

with tllf:' Haller Theorv, and it worked nicely. Since the twometllOds worked so w~lI together, it is appropriate to discussthem hoth in the same hook.

153

CHAPTER 1

THE STR()NCE,ST STOCKS

For spveral yeilr.~ T Iwd noticrd a remnrknlile phenomenonwhich or-onrred rlC'gnlmly in thl': stock market. During ther-onrse of fI yenr, the 2,5(l() stocks trfldf'd on tlll': New YorkStork Exchangp. and the American Stock Exchange wonldexperience difll'rf'nt kimh of price movements,

WllPTl a hull market was in progress, ahon! (l!)% to 7!)% ofthe stocks fHlvnnccd. Ahrmt 15% to 25']1' declined. find ;Ibout10% rernninr-d lmdHmgcd.

OF th(>stocks which nrlvnnced in price, the majority usuallyadv:mcpr! less thnn 80% ill n year. Only a small number ofstocks flrlvnncpd more thnn 100%. Tlw [r-w higll flyprs whkhfldvflll('Pr] more than 9.00% ronlrJ nsuallv hf' cOlln!pd on thefingflrs of nnp lnmd. SnnwliTllc.s nne or Iwo slocks wonld riseman' t hnn 500% in fl vnnr.

ant of the 2/)00 Sf(ll'!<strarkrl on lllf' two mnjor ('n·hflnl~psin this conn!ry. only a few hppnme hi~rh f!veTS. Those few

•• •• ."'1 ,.

stocks will he rememherccl for many )'cRr~ for thc:ir nlll::lzingperfnrrnnnces. Some investors made [ortrmr-s hy hl1ying out-stfmding stocks like Tliioko], American Motors, Texas In-strnrnonts, Pohroid nnr1 Brunswick,

At first I W;lS nfmid to ("'PI! conskler lmying fl high flyerbecause T thOllght that a stock which went IIp mpirllv couldalso go down rapidly. TIH'n I discovered that the low flyers,

154

THE S'rnONGFBT STOCKS 155and e\!pn high quality growth stocks, could also go downra 1'irll)'.

The risk of loss existed regardless. of which stock wasbought. So J figurerl that if the risk coulcfnot he eliminated,why should T strain my hrain muscles trying to make a ~O%profit wlien T might try for a 100% profit with the sameamount of brain fnligne?

The risk in the st<~ckmarket is so great that one might hejnslifiml ill trying for tlw largest possible profit in an attemptto ohtain adf'qllilte oornpensatlon for taking the risk.

I dcr-.idf'd that T WOlJ1r1 try to develop a method of identi-fying potential high flyers. I studied the outstanding stocksof previous )'f'nrs in an nHf'mpt to discover whnt they hadthnt the other stocks did not have. <

I noticf'd thnt most of the high flyers had in~ffmsed earn-ings, hut so did many of the other stocks whir), never he-ramp 11i~h flyNS. Som~ of the well known growth stocks evenwent into Inrge declinps despite their incrc::Jsed earnings. Myconclusion was that increased earnings was an importantfactor, Imt it was not the most important cltarncteristic ofthe high flyers.

I discovered that there was one 01Jtst~~lding char~ct~risticpossessed only hy ihe high {IJ:~rs.}!w.a~!he unusuallylargeextent of their increase in prien. The high flyers moved np-warrl nmf'h f;nlher and Iaster than the other .stockS. A stockhppamA o111shmdillg' on 11'when it demonstraterl its nhility tooutperform thE')other stocks. '

While pnnming that line of tltinking, T kept in mind thattJw hasir- force infhlPncin~ Ihe advance or df>cline of n stockis the supply and demand for that stock. If the supply isgrcnter than thf' riemann. a stock will go down. If the de-mand is greater than the supply, a slack will go "1" Aconsistent increase in net demand will be indicated by aconsistent rise in tIle price of n stock.

156 TIm STnoNGF,ST STorKS

If tho nd demand for nTH' pari icular ~Io(·k is eons;stPIlI lygreater than t]](' net (1fmlfl!Hlfor any other stm-k, that par-ticular srock will go up farther than ::my ot her stock. TIJPn~-fore, one can r-valunte tlw l"f,ln!ive rlomand for di1fPrf'ntstocks hy {~omparing the pricf' changes of t!Jose stor-ks,

The stocks which experience the grcalrst increase in priceare the strongest stocks in the market. J lJ,"'!ieve the strongeststocks have the best chance of making the largest gains.

To discover which stocks wen~ tllP strongest :1ml weremo"";ing Il!wmrcl larther and faster th:1n the otIH>rs, I com-pared the percenta e of .-icp increase of many iHft'erents oc s in a sped rc time period. The lime pprioc can varyacconlinl! to the wishes of tll(~ wrson mflking thp com rnrison.

ne p~'rson mig It wish 10 use a t iree or' onr month com-•u:t=ison pnio(l, while anotlwr pNson might prder a six monthperiod of comparison. 111 prderence is for a minimum com-par!son pcriod of six months.

YVlwn I selected T\VA warrant's as one of tlw strongestissues in Ihe market, J was nsing a cnmnlative time periodwhich st;lrfed on J arumrv n. 19():1, and PllCI('clon the <latewhen T W:lSmaking the c-omparison. The time period whichI llSAd for my strAngth stl1rlies in the second 1IaIf of 1DR:]changcrl fron~ six months, to seven months. to Aight months,anrl so on, as tll" year pmgrpsse(l. Tlw minimum tirne periodJ l1sf'd in lfl().1 W:1Ssix months.

,~/l1f'n T 111:1k('up n list "r thf' slronf!('st stocks, 1 shnl h)'taldng the stoc.: market rngAs from the hlest l1f'wspnpcr.Then I I:,kf' from mv Illes 11Ip sfock market -pnf';f's from am~wspnp('r of six mo,;fhs ngo, or nny other d,ltp T wish 10 nsf'in tIl(' c()lnparison. 1 snvp Barron's or the nn:lllcinl sedion ofthe Slll1dTVnewspaper PV(1)' week, 10 provide :111fle{'llrntprpeonl ()f wel'1,h' stock pricf's. nllfl nll1l'r rhtn. Mv f1]8s gohnck for severn1' years, and :1r8 n great I1f'lp in my n>seflreh.

'J1m STnONGF.c;T STOCKS

With the two newspapers in front of me, ! 1'1111 down thelist of sfock prices, mnking rnpid mental caloulations of tTlea 1)roximate wrcentage of the price chan e of eve r inwhich T nm int('rpsfPr!. \V If'Tl spe a stoe with a l~rge priceincrease, T pIll it on my list. . ,• Coing through Ihe pnpef1hat way, I check about 1,000slocks. When J finish, I go hack through the list with myslide rule, Tllnking aocnrate calculations of the perc('ntngepricf' increases. ,!::,inn1Jy,T r('armnge my Jist, putting the~ITon~pst slacks fit the tgp. .

On my list of strongest stocks I do not include stQcks seJ)-).';;L ...._"" .... .. ,. .....•

in under the rrice of $10. rer share because I fw'l thflr-such.-,- ...,.-.--,.~-"-'"

ow rieed stocks are less ue one n ) a in )crfnrmnnce f ran1](' higher prie('( stoc s.

When llsing my strength studies, my policy is to. avoid or1211stocks whkh are suspended or dclisteu from trading> oir'lhe exchange. 1 preff'r also to avoid or sell stocks in which• r . - - .0/. __.................••.._, -_ ..... _-._._--<-sJ:.Q.p loss QrdpfS 'iJre banue'J.. .(

A suspension of sto 1 loss ordprs has fre uenrlv Imt notalways mar ed fhe end of a stock's status 11S a high flyer.',;'1Ien the NYSE or th(' ASE bans a]1 stop orders in a stock, itis ractic-allv fl lIhlic annnnnr-emenf that there is too muchspce1J ative activity in that stock, and it is heeomin difficultto maintain an on ('I' y mar ('I ill it..- '''Theil excessi ve speclI lntive activitv dominates Ihe n.d ionof a stock 'Ill' f'11d is usunllv not too' far away, eveu if stoporrlPJ"sare not h:mllf'rl fit that time.

To illustrate mv point, here is an example of wlHlt hap-pcned, and wlm! 1 dill whnn stop orders were hann('[l inastor-k Townrxl.

In Marc-h, 10R] T h:1rl :J long position in Brunswick. whichwas one of the 1)('sf high flyers at that time. Stop onlf'rs wereharmed in Brrmxwick sliort lv after it rcache~l its lligh8st-' .....•

Till': STI10NCEST STOCKSTHE STHONGF$T STOCKS 159

price, whil·h was 74~/R. I sold Hrunswick the next morning at70, hecallsf~ of tlw han. Tt inllnecliately stnrtecl a large declinewhich 11fIsoontinued fnr three vcnrs. As 1 write this, Hmns-wick sells nt 9. .

Now yon mighl say "Just a minute, A hnn on slop lossorders can not chnnge the trend of a stock" My reply is that

YOll are ahsolutelv correct. The only thlnz flwt. can chan!!e.' \~ (".,

the trend of a stock is the hn [nnr-e of tIll' supply and dplmmdfor that stock.

A ban on stop orrlerx is :111Indication 10 mr- thnt a highflyer has rpndwd tlw point whpre its action is dominated hyexcessive speculation. That frecJlJ('ntly turns 011t to he thebest time to sell a high Over, for such hectiC' specllbtiv(' aotiv-ity sometimes indicates the lop of the move for n sfoek andthe time to take contrary nr-tion. Althongh a l1a11on stop or-ders does not always indicate a good time to sell, it sometimescOEl.esanwzingly close to the exact top.

The most ontstanding high Oyer of HKn was Syntex. TheAmerican Stock Exch::1llW~banned stop orders in odd lots ofSvntex OJ) Or-roher 2:1, lO(n (The ASF hns not permiltpdstop orders in rnunr] lots of ::lny stock since 19m.) That didnot turn nut to he a good timo to sp11,for tllP stopk continuedgoing 11r strongly. Thnt han was rpscinclecl on Decemher 2,190:1.

The highest price H~ac'lwclhy Svntex was 1D01/2, recordedon [annnrv l!'5, lOG4.The nexl clny, on Jml11arv 16, stop orclorsin oclrl lots of Svntex were harmed aplin. Then the stockdropped like n 1101ll11. EIght weeks later Syntpx was spl1ing at73, which was rnor« than n r,no-t" (/Pclinp from its high.

Here is a list of stocks in w1Jkh stor orders were sus-pended 0n the New York Stock Exchange dming the last fiveye::lrs. The han heC'nme ('fT('ctive at the opening on the date

shown.

STOP T .oss ORDER SUSPENSIONS

Sep' ('m1)!'r 8, 1f)~RMay 7, Hl!)9October 2,9, ]gr)!JNovember 6, 1m)!}Fehruarv [,5, In()O~'farch 11, 1960Jnn(' 21, H)()O;\ugust 11. !9ROAugust ,QO,1960Augnst ~1, 19mJannary 20, 1961March 9,1961May 9, 19mFohruary 21, 190.'3September 9, 19f1,'3April 27, 10M

1'1](' lnst strength study T made before buying TWA war-rants was on Septemher 1.5, 1963, It covered a period of nineand a half months. That study, and several others are pre-sented here. ns examples.

TTlT': STHONCfo:ST STOCKS THl': STTIONGKC;T STOCKS

Trm STI\ONGFSr STOCKS

On J f!mHlry 1, 196.'3

Pric(' On Price OnJll1y L 1902 Jan. l.l<Jm

THE STRONGE.':T STOCKS

On March 17, 196.'3

GainPrice On Price On

Sept, 16, 1962, March 17, 19(jf1%

Gain----- ..-- ---_._-----------"--~-_._--

Soo J .ine Hailroad ,,)1/2 11% ] 14'10

U. S. Sm('lting 24 49 104%

Nationa 1 Airlir-es ]:1 2-1% 91%

Internafional Pack('rs 9% 177JR R5%

Delti! Air T,ines :1~W2 00 79%

Chrysler 4:1V4 7:1% 70%

Allq~hany Corp. 71/R 11% SS'7o

Colmnhifl Pid1Tres H% 2:1% 50%

Motor Wheel ]1 17 f);)~~

50(1 Linn Ilailrond 5% 14% 149%U. S. STnf~ltin~e 3G% 78th 1]4%Monon Rni]road "D" 5% 12% ]13%Chrysler 56% 91% 61%Shalrmoon 9V4 14% ,58%Austin Nirhoh 17 26% 53%Metromerlln 14% 20% 41%Pan American \V. Airwavs 19V4 26% :19%1,VA Common 9% 12% 25%

Tllis p:nfieular strC'ngth study does not ilwlll(ln any stockson the Alllcricnn Stock Exchange.

• Stop 10« OrclN" were banned in n. S. Smelting on Fobruary 21, H1A:l.At that timp it .<old nt 7.5.

Theso sturlies do 110t include a11 of the stocks on t11(' NewYork Stock EXC'\lnnge and the American Stock Exchnnge he-cause J only watr-h about 1,000 of them. Tllf'Te were 11n-

dOllhterlly other strong stocks which I did not notice.

162 TIm STHONGEST STOCKS

TIfF. Sl1l0NGF.<;T STOCKS

On J11IlC 30, 1963

Price On Price OnJrtn. 6, W63 June .'W, 1963

%Cain

SyntexAmr-r. Ag. ChemicalM etrom cd iaSoo Line RailroadPan Amerloan \V. AirwaysChryslerCllicago & N. W. R RMonon Rnilroad "Il"Eversharp1,V i\ CommonCenoral MotorsIBM

37%24%16%12%21%38 ••14%1026%11%59%

397

8145%2R%21%36%(}.'3

24%1641%J7Yz7m~

4.'36%

TIlE STRONGF.'IT STOCKS

THE STRONGEST STOCKS

On September 15, 1963

Price On Price OnJan. 6, 1963 Sept.15,19R.1

%Gain

118%88%76%(jg%68%(l()%

66%()O%

57%54%18%10%

SyntexMonon Railroar] "H"Control Data ••T\"'A 'Warrants]\·f ptronlPdia'Vestern Air LinesChicago & N. W. H. H.T\VA CommonPan American \V. AirwaysChryslerSoo Line RailroadXeroxCcnera 1 MotorsIBM

37V410

36% ••••

4%16%30'AJ].4%11%21%.'38 e e "

12%] R.'3 %

59%397"11,,· price of Chrysler Is adjusted for the 2 for] .•tock split.

GC1H'ra1 Motors and IBM were included on this list to com-pare thpir lligh quality, h1JJe chip performance with the ac-tion of t1m strongf'st stocks.

13724%89th10%34%64SO23%42%73'AJ23%

282%77%

45.5lh

270%146%14.'5%137%116%113%104%103%

9.5%92%84%73%30%15%

••stop loss orrlors were harmed in Control Data on September 9, HlA1.At that time Control Data sold at 101.N;;"J.'rice of March. j9fl3 when Control Data was first listed on the

• e e The price of Chrysler is adjusted for tIle stock split.

TTlF. sTnONI:vsr STorKS lOS

rIll' .~ImIlW'.,<;! ai"1ilH~ iSSflf~ on Illy Jist'. Twas illlprrssed I),;, tlwstrenglh 01 Ih~ n irliuo ~n~np, because [our of tllf' top nines!ock~ on I11V h.sl W('I'(' nirlino stocks,

TT :.',' " ,-1., !--"i','" {1" f ,-. r "

III flit' p:ls1 I did 1!l)lllSC mv Stroll!,,"s! S!ock C(Jlt('('p! :IS anahso1IItely rigid system I ]ookf'd llPOll the s!rcnglh :tlld per-f01'n1:1""" c!l1npariS!lIlS :lS a l111'I11Od of h,'inging Iho <llmllgest

r .1 . , ': -, ''1'1.,''_ T :d:·

19G:~ I SNiollsl." (,(]llSidered iJl'ying It,lliC reason J (i;(\ nothll)' Syntl"{ \Vas IJI:l! it was a foreign company, incorporatedin Pan:llJ1a, with 1wadqllnrlf'rs ill l'vrrxico. Now, ns 1100k hack,T "~r' <;Dr 'h-'" 1"ne , T"'"'' ~,..:'c"r T ,T'-'- 1"·'·11'!..' [!h011' <:,,11"''1:.

\V('sl('1'11 Air LinesT\V A Common

'Pan Arnr-rican \V. Airwavs

113% Gain1O~% Gainq:;7~ Gnin

••........ . '" -, , ' ~. Thr- nir,line yrollp was so strong that it sef'lnpd Iikr a good

opporll1111tv. So T honght TvVA warrants at a prief' of 10 on!)W'(, lll:ngin. '

Wlien ] was n';ldy to make my secolld pnrchase of T\VAwnrru nl s at 12V? 011 Novornher 1, it was nhvions 10 TTH' thntSvntox was the outstnnclinz stock of Hl60.11w night lwforP Tmarlo the purr-hose, T spent several hours consi(h,'rillg the rel-al ivr- mr-ril s of Synlex and T\,VA warrants. '

T rtnnl1y rkl'ided that 1'\"1 A wnrrnnts e011ld still go up much[nrthor. and 11]('v shonk1 hI' lwJped hv the trr-mendonsSI~Cl,lgth of the nir~in('grollp, T was sold on the i<]r.n of pynl-nllflmg mv proflf 111 11)[' wnrrnnts. an(l T wns eOllVilH'('d Ih:lt

thry wonld I~o 11p to Iii to donhle nll 111(' monov ill mv an-r-ouul. '

Svntr-x 1wd ;l!rr:l(ly ~~(lIH' np so [n r ll1nt I did not he1ip\,p itconlrl go np much highcr. Sn T houghl T\VA warrants. Twasril~hl aho1l1 t he warrants, nnrl rhev went 10 1R flllr' evenhi~~IH'r. 1\1111 was 'wrong aho1lt Sv~tpx ngain. Svnl ex mad I'

a11oll)('r 1rl'1llC1H]ons ga in, which would ha ve hccn exlrcmd v

pmfi!allkTTpn' is :l stndy of tl](' s'Tongest stoeh dnring thr f'lltim

year of 1D0:1. 1t shows which stocks were the top pE'rfornlf'rs

of the )'par.

For l1ln1l1hs T frolt sad nhont Ih;11 misl;1kp, hec:Hlse Syntl'xgainf'd '),:10,.,{, hdwPl'll Septplllhcr If), 1D()~ nnd J:HlIl:ny 10,I9fH. O:11111:11"Y l~ was Ih,' (hIp on which T sold T\VA war-rrrnts.] Tlnd T ])f'pll smart enollp.:h to llll)' Svnt ox. InV profitwonld hnv« llCen 460,]{., hnying on ;;OSf, margin. (\'\'hcll Jhonght T\VA wnrrnnt s on ;'0% margin. T only lllndc a profil of

lfJO'?{' on 11H~ trndr.)r-.1ollon Hnih'oml "Jf' was 'hI' second strongest slr)('l< on my

list of S"ptf'mher 1!J. r did not consider huyinf'; it 1Jf'('flUSC ithad hepl1 high 011 t!Jc list of strongest stocks (or manv monlhs,and 1 IhollglJ1 if "\'o,,ld not lIP ahle 10 ,,-0 lnlwll lJiV1wr. Two.ronths [nl er, Monon "H" had risen :lW'~,from its priep ofSpptP11l1,f'r l!". h1l1 it slipprrl 11:]('k to n ~~nin d only 2R'Y"'(, hyJatlllnlY I~, 1\)(;4. 1 was right ahont Monon "n"

Conlrol Dafn was Ihe tllirrl slron\u'st- slock on 111V list ofScplPlll!lror IfJ T did not ('onsicler hllving if lwc;111sf' on Sr-p-tPlllhcT q, H)():1,Ill'~ l'Jc\'J York Stpck F'(('h:111f~1' imposed fl

hnn Oll <fOp rJl'{krc ill Control Dnta. At tll:lI limp it ,sold :11 ;1

pricr .ruu Control ]):11:1 gained onlv 12',f;,'?(, [rruu Sr']1lpll1-

her 1;; In Jmluary 1:), so T W;lS right ill uo! ('onsidpl'ing thop11r('hns(' of Control Dnln in Seplf'ln11f'r.

T\V A wnrr:1llls W;1StlH' Iourth str01l!!pst iSSIlf' on my list ofSeptemlwr J!J. 'TW A Wflrrants lnokf'rl good to me, for it W;IS

TRF. STftONGEST STOCK~

Tim S'n\nNc-EsT STOCKS IN 10fn

Price On Pric(' OnJ an. 0, H)W1 J ;l11. G, J!)01

SyntexT\VA WnrrantsMonon ]lnilroa(] "B"1W A CommonControl DataDenntson Mfg. "A"Western Air LinesXeroxPan American '!\T. AirwaysChryslerSoo Line Hail roadU. S. SmpltingGem'ral MotorsIBMPolaroid

12% e

4%]()]1%36'12W%30%32,% ••2,1%3R ~12%57%59%

397147%

12fWz1(}%SO32::;'

JO()%!'i,'P4

78%R4'1254%R~%

21%R8%79

.'118182V4

TTiF. STnONGF.:'iT STOCKS

OneYearCain

\Vhen I included n11stocks sPlling under $10. in tl1(~corn-pnrisnn, TWA warrnnls slipped into third plnee, with MackeyAirlines in second place. Mar-key rose from a price of $1. pershare to $R. per share in 1qG~. When I included stocks sellingunder $10 .. tIl(' f'op thrf'f' high flyers looked like this:

H31)%271)"/'.200%JR7%176%]72%J 62%]GO%1:50%120%70%S3%32%30%

24%

Svntr-xM aokev AirlinesT\V A Warrants

9,35% f:nin700% f:nin27.1% Gain

Syntex reached a ltigh of 1901h on January 1.5, HJA4. Thenext day Syntex was 1Inahle to open and did not trade at allthat day. A flor frading was resumed in Syntex on Jannary 17,it clcclinf'd rapidly until it reached 73 on March 10, J964.

TWA wnrrnnts reached a high of 20% on [anuarv 14, HJ64.Then they c1pclined rapidly until they reached W·on Fehru-ary 5, 1964. (T\VA warrants later advanced again to reach ahigh of :30lh on Jnly 10, 1964.)

Mackey Airlines reached a high of 8% on January ]4, 1964.Then it dediTwd rapidly to 6 on January 27, 1964,

These top three high flyers of 1963 reached their Jannaryhighs only 0118 dn)' apart. The proximity of those dates shouldmake yOIl slop and think. I interpreted that action as a spec-ulative climax in nIP. hllll market.

M iH"key Airlincs became the number two high flyer of 196.1despite a d"clillc in earnings. The company reported earningsof $10.109. ill 19112, nncl a loss of $104,978. in 196.1. Mackeywould lwve heen ::J good lmy ::Jt any time dllfing JnR~, butsome of the olhr-r strong stocks selling rmrler $10. did notturn our so well.

To illustrate why J am not too enthusiastic about stocksselling under $10.; let me point out that Mackey Airlinesstock experienced 3 decline of 17% in one normal day's trad-ing on [nnuarv 27, ]964. For the person who might have

Polaroid W:lS ind1Hlpr1 on this list heoause, dming 19A3,some flnnnr-ia] writers frpq1Jpntly mentioned it as a glnmorstock.

Soo Line' llailroad and U. S. Smelting appear on lIre li~t ofStrongest Slocks '11 10n1 only to show how much 1!J"ir rela-tive strenlTlh declined from where it W:lS pnrlipr in ]!:lR3.

At thf> ~'rl(l of 19A3 T compared Ihe lwrccntrtge gains of allflw 2,500 srocks on tho NYSE and the ASK ~1y comparisonof stocks sp1Jing over $10. pPr share showed that Svntex wasthe largest gainer. and T'VA warrants wns IIIP second largpstgainer of ]963.

THF. STI10NGF.ST STOcrS ]69] f)8 TIm STllONGFST STOCKS

hought iVf;lckpy ',)1 500(, Jll~rgin, th~117~r, dcclillP would h:1vPmeant a p~lllf'r loss of :140;" in one day.

Then" 'W:1Sno genpn11 panic in the stock marker on tllnlclay, or dming thflt wepk. I eonld not find anv reason for tIl('h1:ge drop in Mackey, except that Svntcx anr] T\VAw:1rrantsalso exp(~ri('n('e(1 large dcclines on tlUlt snnlf' day. H sPPIllPdlike the top three high [lvers were moving in unison.

PEHFOHMANCE OF EXHAusn~D HIGH FLYERS IN 1963

Amrrrican MotorsAmerican PhotocopyAnken ChemicalAvnot ElectronicsE. L. BruceBrunswickFairchild CameraGolf American LandKorvettoPolaroidTexas InstrumentsThiokolTransitronUniversal MatchVarian Associates

EXHAUSTED TTIGlT FT,YEHS

While we are on th(' sub'eet of declines I wish to remind) u that high lIyers ( 0 not go up [nrnvcr. 'V!len high flyers~'lm 011t of steam and enel their fantastic advnnres, thov llSI1-a Iy 0 rlown nnr! do not c im 1 J:1C or at ('ast severn yenrs.,,x aust ml hi 1h fI 'ers shOll Id he avoic ('( i P 1C P ague.

Thiol<ol mnde its high in H). , , am llPver went lac < I1p tothat level. Amorican Motors made its high in 1f)PlQ, nnrl llPverwent h:wk to Ihnl level. Texas Jnstnllllpnts mack, its high in1960, and never came hnck. Polaroid madc its high in 1960,and never cnrne hack. BrnllSwick mack if s high in 19m, andnever came hack. There are many others, too numermlS 10

mention.M' , parch sh '11 exhausted hi r1l Hyers nrc less likd r

to stage a (rood grlvaucc than stocks whic I rave never reeniill Hyers To illustrale this 11nus11al idea of mill!', 101 11.Sexamine 11)(' pplTent:lg0 prke changes of a gronp of ex-

hausted high flyers. .rDw followin!' ~tlJ(lv shows price gains ::lIld losses clnnng

the tWAlvp mn~'h I)('ri()(l C1Hlillg Jamwrv G, 1<)f)4. \Vhile ex-amining this lisl, rememher that 1963 was a hull. I11nr1«'1vear,even though most of these stocks do not show It.

4% Gain1% Loss

,58% Loss39% Loss

.~% Cnin38% Loss24% Loss31% Loss17% Gain24% Gain32% Gain39% Loss23% Loss

9% Loss53% Loss

The list showing the performance of exhausted high flyersin 1963 indicates that hargain hunting for the high Hyers ofprevious years is not a very profitable venture.

A high Oyer docs not usually tum out to he the kind ofstock that should he put away and held for many years bythe investor who is interested in maximum profits. Look whathappened to Bmnswiek. It dpclined from 74% to 9.

Let llS consider, for a moment, the tragic case of the bar-gain hunter who might have honght Brunswick at 35. think-ing it wns a good hll)' hecnuse it was available at less thanhalf of its previous price of 74%. The Fact that Brunswick haddcclinpd more than ,1'10% did not make it a good huy, and thestock continnAd moving downward.

By the time Brunswick had declined to 17, the hargainhunter had n Joss equal to 50% of the capital invested in thattrade. Tf Ihe hnrgain hunter became disgusted after severalyears, and fina 11y sold out around 12, he sustained a tremen-

170 THF. STnONGFSr STOCKS

dons loss, and his capif:ll was !it'd up for several yf'ars with-ant prodncing a profit.

Some of Ihe cdla1lSted high flyers on tlle 19G3 pf'rform-ance list were rf'f'omlllemlf'd frequently hy financial writersin U)(}:1, hut I would not even consider huying an exhaustedhigh flyer. Tl10 odds nrc not in favor of success. Many inves-tors have lost money on Ilwir purchases of fallen high flyf'rs.Some of rhoso ]oss('s might have hef'n avoided if they hadknown ahout my exhrmsted high flyPr theory.

The hasio trouble with exhausted high flyers is that thesupply of s!m·k is much greater than the demand. Demand islight hecnnse the stock has stopped going up, and is no longera high flyer.

The reason so rnnoh sror-k is availnhle for sale is lJPc:1nse ofthe "owrlwad supply". Overhead supply is 11](>brge amountof stock pnrchnsf'd at higher prices, when the high Ilvcr washlasting 1Ipwnnl. Since 'h<' majority is usually wrong. we canassume Ihnt the majority of investors did nor sell out near thetop. YV1H'nprices rlrx-line, many people arc holding long po-sitions nt a loss.

\VI)('n the nverage person sees thnt his capital has beentif'd up for two or thrpe venrs with nothing to shoyv for it huta loss, he Ilnnllv becomes disgusted and decides to spl] on thenext rally. So ,,~lwnf'ver a rally starts, the overhead supply isthere, trving to sell nut.

\VlWll' a high Ilver is on its wny up for Ilw first t ime, and isin now high tprrilory, then' is no over1wnrl snpplv to contendwith ])('c[l1lse i! has never sold at thnt price lldorp. In thatsituation, the only sdling rressnre camps from profit tnkingand short splling. That is why high flyers can go up so far andso fns(--many ppoplp want to buy, and few people want tosell.

CHAPTER 2

TIlE ULTIMATE WEAPON

As a result of my research and personal experience, J con-eluded that the idea] time to bllya.high Ilyer might be when itbecomes the strongest stockin.-tJ1e 1Tl~I~~t)~ising farthe~ _andfaster than the other stocks. Then the time to sell would bew~)en tile trend of tho high~i~~~~I~_S __~i;~~,~~:,vilen s_omeother stock becomes_s.~rong{>,:t:..

To organize these ideas into an efficient operational pro-cedure, I developed a mechanical method for trading in thestrongest stocks. It's more than just a method for makingprofits. It's designed to he a method for selecting and tradingin tlw most oufsl:mding high flyers of all time. The methodmight systematically put one into fantastic stocks like Thio-kol, Texas Instruments and Syntex.

TIl(' method seems to he capahle of such interesting possi-hilities that I call it the "Ultimate Weapon". To me it seemsmore exciting than anything else I have ever heard of in con-nection with the stock market.

Here are the details of the method:

1. Make a list of the strongest stocks about once a month, oronce eVf'ry two or th~ee montl~s.Tl~;ti~le-i~i:~~;~j ~ouldvary according to the wishes of the person using themethod. Do not include stoc_~~_~~!!i1?:gund~:J~.9..:.J2~!-sl~~!~:_

171

There are manv mefhods for <kfennining slock tremls.- '

There HH' 10 week moving HverHges, 20 week moving av-eraw~s, 200 day moving nvemges, point and figure charts. andbar charts. There an' head nnd sh01J1der fonmllions, triflnf,!;1<~s,trend lines. and lower lows. None of tllPse ITPml dP!(mniningdevices are perfect. Sonw of them rf'l]uire a great deal of work.If yon have a [nvnrit« lllefhml, hy all means feel hcf' to suh-stitute it for the simple method I mentioned <J 110ve.

I do 110tclaim that my 25% price dccline method is hetterthan the otllPr,<;.T jnst l1S(' il hen' hecallsf' it is fns! :ll1d ensyto work with,

The Ultimnte vVrapon method w0111dhave achieved thefollowing Tl'SllllSin 1901, using lIlA SI rongest Stock Lists inthe previous chapter: (Those lists were compiled about onceevery three months.)

On Jmmary 2, H)(j.3 Son Line Hailroa(l was tlle strongeststock on my Jist. So it won 1(1have heen hought then at 11%.Soo I ,ine was still Ilw strongest stock on the list of Mart-h 17,so no action would have heen tnken nt rhat time.

On flIP list of Jnne :10, 1863 Sao Line had slipped to fonrth

THE T1T.TTMATE WEAPON 17:3

place, So if would have been sold then M 2Jlh, with a profitof 8.1%.

Syntex was the strongest stock on the list of June 30, so itwould have heen honght then at a price of 81 Svnte '_ ,.. • L ,x '\, asstill Ihe strongest stock on the list of Septeml1Pr-15, so noaction would have heen taken at that time. The stock WlIS

split three for one in November, 1963.The. trend of Syntpx turned down on Jm11lnry 21, ]864

when It closerl at 1.16, w1lidl was more than 25% helm" thehigllPst pricf' of 19m~. Syntex would have heen sold at theopenin~ the next morning at 1421h,with a proHt of 427%.

If this program had he en started in [anuary, 186.'3 with$] ,000:, the init ia1capital wonld have gn;wn to :$1,780. whenSoo Line was sold. The $1,780. invested in Svntex would1I~ve ~?'OWIlto $8,180, by Jannary 22, 1964. TI;e profits oh-hllllCd III 1f'SSllinn thirteen months would have amounted tomorA. than 800% of the initial capital, without tmding onmargm.

'l~llPre w<,mld have hePII only the two trades dming thatl)('1'!od of s1lghtl)' more than one yeHr. Each of fhe two tradeslastpd a110111 six months. so all the profits would have beeneligihle for lon,{~term capital gain tax treatment.

It is inf~r{'stin~ to ohservp" that the Ultimate 'Venponmethod, with a SImple mathernatical procedure, achievedmuch better results in 1961 than T did with my use of logic inthp selpction of thc strongest stocks. .. 'Vhen I sel('d<'d T~T A warrants from the strongest stocks

hy the use of logic, and hacked up my selection with cash I\Va: also nsing the Ultimate 'Weapon' method to mnke th~o-rctical trades on paper . .It was9(?:Y-Jlright irritating to sees~lch a simple, .nnt!linki~lg_~~!.~?-~.P!~d~~~!!!g)~~g~i-E~~;fi~"~::~I~s~Ol1ld with the !ota} ..~o.bi1!~~,ti,~!1~~!_.<J:IJ..!!!y_l!!a.ill_~Ql:::

One should not assume that the Ultimate Weapon would

172 TTlE l1LTIJ\,{ATE WEAPON

2. BIl)' tllP one stock at the very top of the Strongest StockList.

3. When a new stock reaches the top position all the list, sellout and switch into that new stock.

4. Continue switching into each new stock which reaches the~op of the list.

5, Sell out if the trend of the stock turns down before aswitch is called for. The simple tT('Jl(l imlicnlor. which Ideveloped for use with the Ultimflte Weapon, says thatthe trend of a stock turns down when that stock has adaily dosing price which is 25% below the higl18st price

..recorded by that stock.

174 THE TTLTlJ\fATE WEAPON THE ULTIMATE WEAPON 175

TIJis ide" of mine is similar to Newton's first law of motionliich S;lYS: "A hody tends to c07itlIl~e III H~ stat~of r~~t()~tlnjfon~l monon UI _._ L~.<;?-mpel!~4J~sJ.1~ngethat state

by forces lmpresse on I . . .-.-----.

achieve such fantastic profits in Ill('. Iulurc, Past performanceis not a gnarnntpf) of futnre pf'l"formancc. There is no phpicallaw whi~h says thflt the strongest stock must continue goingup nfler vou huv it.

Sometimes the purc-hase of the strongpst stock would resnltin a loss. Belore lIsing such a method, or nny other method, aperson should consider thf' possibility of loss as well as thepossibility of profit.

A disadvantage of this method is that one can not say anycertain stock is the strongest until after the fact has heenproven hy that stock rising more than any other stock. Bythat time it has usually alrparly gone up ]00% or more. jvfnnypeople would S3Y it is insane to think of Imying a stock afterit has already gone lip mom IlwlI 100%. T gllf~SST will h[lv0 toplead insanity and hase my defense on thp. following fads:

When J hought TWA warrants at 10, they 11fld aJrprldygone up 117%. Then they went up another 1130% in the fol-lowing six months to reach a high of 26. The warrants even-tnnlly rear-hed n high of 30% on Jnly 10, HlR4.

When Soo Line became the strongest stock in [nnnary,1963, it had already gone up 114% in six months. Then SooLine went up another ]]8% in the following six months toreach a high of 25%. Son Line eventuallv reached n high of43% on [nne 1, Hl64.

\,yhel~ Svntex lwr-ame the strongest srock in [nne, 196.1, ithad nlreadv gone np 118f':{, in six months, After Ihnl Svntexwent "p more Illnn 400% in tIlA following six ancl 3 hnlrmonths.I believe that when a stock achieves ::t velocity of upwnrr]

mo~:ement, which is greater than the velocity of any otherstock, it tends to continue moving upward at that speed nnri]influenced by a force strong enough to terminate its move-ment. This hnsif' thouuht is the foundation of my Strongest.".. _ r: _ t

Stock Concept.

]I.{ ATHEM ATICS OF TRADING 177

CUAPTER 3

When Mackc)' Airlines rose from 1 to 8, the gain was 7points. A 7 point gain in Mackey sounds pretty close to the8 point gain in T'VA warrants, hilt when you calculate thepercentage, yOll find that Mackey went up' 700%. No matterhow much or how little money you might have had investedin Mackey Airlines, it would have increased 700% dming thattime.

When a person says that a stock went up one point, thatstatement, by itself, is practically meaningless. One pointcould he ]% or ]0% or ]00%, depending on the price of thestock. Instead of thinking ahont price changes in points, weshould develop the habit of thinking ahout price changes inpercentaw~s.

rvt ;\ TIl EM ;\ TIC S 0 F T RAJ) 1N (:

I have hpen intp,resh'd in nwillematics ever since T was ateen-agel'. This interest was not in the higher forms of ma.th,hilt rather in the practical applications of simple nwthemat~cs.

1'1 . . nro many wavs in which the silll\ •.Jlest forms of nrit h-\e1c"" ,

metic can help to I~ake important decisions. MARGIN

PERCENTAGES When yOll hlly stock on margin, you are aCh1311y horrow-ing money from yom stock broker to Hnance part of yourstock purchase. YOIl must pay interest on the money har-rowed from a hroker, or any other commercial source. Theinterest rate varies in accordance with the rates of regularlending institutions.

The mflrgin requirement is determined I111C]announcedpulilicly hy the Ff'deral Reserve Board. During recent years,margin requirements have heen 50%, 70%, or \10%. Whenthe stock mnrker is low, the FHH usually permits 50% mar-gins. When the market moves higher, the margin require-ment is nsnallv rniserl to 70%.

"rhml tIl(' market is oonsidered to he dangerously high, themargin requirement is usually raised to 90%. The FHB con-trols Tllnrgin requirements to help stnbillze the market hI' dls-coumging eX('f'ssive speculative activity when the stockmarket is thought to 1m too high .

If yon huy stock on margin, and the stock declines drasti-cally, the broker will send out a margin call, asking yon to

In the previolls chapters, you may have wondered why I. 1 hasi ,1 er t"ge of 11ri('(' chflngesplaced so muc 1 emp rasrs on . 1e pNC -n n' . .., .; c"

The reason is thnt one must use pen:ent::lges 10 ::1('£111arolyrecognize the extent of price changes in stocks. To illustrateexactly what I mr-a n, I will use several actunl f'xmnples ofprice changes in stocks during HJ63. . _ .

"Vhen IBM rose from fI price of 400 to ;)00, the gam was]00 points. A ]f)0 point gain sounds quill" impressive, l~utwhen you lise percentflgc, you discover Ihat Ihe ] 00 pointgain :lmollntpd 10 only 25%. No matter how 1111lch or h;)\vlittle mnnr-v von might have had invested in TBM <1nrmg~hnt time, it ,~01l1cll':lve incrc:lsed hy 2S%-110 more. no less.

Vlhen TYVA wnrnmts rose from 10 to 18, the gain was 8points. An R point gnin dops not sound \'('1')' irnpres<;ivf', hutin this f'nSC, it nmonnts to 80%. No mnt ter how mnch or how

. III ·1' e Ipd in T'V A wnrrnntslittle 111011£')'von Illig II In ve lac IllV.S . . ,it would ll~,;e incrp:lsed hy 80% dming that time.

176

MATHF.MATTCS OF TRADlNGMATJIF.MATTCS OF TRADING 179

If 11 person should experience two 01' three "small" losseslik~ that in 11 row, it would add up to one big loss. Then hisentire program would be seriously endangered.

If a person should lose 50% of his capital, he would thenhave to ~ake a 100% profit just to regain the capital hestarted WIth. Because of this mathematical oddity, many peo-ple have discovered it is difficult to make money in the stockmarket. That is why I try so hard to avoid even small losses.Theyadd up too fast. .

put up more money to protf'ct his loan to you. If you shouldnot wish to put up ndrlitional monev, you can sell the stockinstead. Brokers do not send. out m::lrgin calls to antagonizetheir oustorners. It is a necessary pr::Jctiee which must hedone to preserve the broker's flnancial responsihility.

VVI10Tla 50% margin requirement is in effect, a customermust put up half or the money nf'c<!cc1to pay for the stock hebuys. When a 70% margin requirement is in ellect, a cus-tomer must put up 70% of the money to pay for the stock. Ifa person buys $1,000. worth of stock on 70% margin, he mustput up $700. in cash, or other securities with n loan vnlue of$700.

Buyiug stock on margin is a form of lr'Verage. By buying on50% margin, a person can buy twic« ::IS milch slof'k as hecould by paying all cash. Therefore. tlH' price fluctuations ofthe stock hought on 50% m;1rgin would affect him twice asmuch as the Ilur-tnntlons (If a stock for wlrir-h he had pnicl allcash. For instance, if a stock honght on !'50% margin shonldgo np 4!'5%, it would he a 90% gain on the invested capital.

Before a person ventures forth to slay a dragon with thiswondrons sword called "leverage", he should realize thatleverage is a donhle-edged sword. One should exercise greatoaut ion in the use of such a weapon. Tf things go wrong, theadventmer could he slain by his own weapon while thedrngon still runs around, devoming maidens.

If a person shonld huy a stock on !"lOo/" mnrgin. it would not11e11ll11Sna:1111" him to place a stop loss order al a pnint ap-proximately 10% helmv his purchase price. Tf that stop orderwas execntf'cl, thp loss would amount to 20%. Hut then onemust add about !'5% for the costs of trading. That makes atotnl loss of 25% for the trade.

The costs include commissions. transfer taxes and intereston the harrowed money. 5% is iust a tentative figore. Actualcosts could vnry from 1% to 15%.

RE-INVESTED PROFITS

~n il1te~esting peculiarity.ot!ll~~h~IEatics is the speed with".'Inch re'l.nvested profits can accumulate, if n per~on is con-sIstently nght. Ha person started with $4,000. and was ableto double his money pve'-tirnes~-lie\\rotlM ha~e '$ iis,ooo.If a person started with $4,OOO:"and-~~;~hJ~to d(~uble hismoney eight limes:·11ewo~(n;a~C$I(j24060.

This lovely eqnationi.<; sl~~tl~~~d, fo/~itj~~ns of the UnitedStates, by the federal income tax on capital gains. But in-vestors in Canada, England, the Bahama Islands and someother countries do not have to pay taxes on capital gains. Sothe equntion could work for investors who live in countrieswith a suirahle tax structure.

I had this fascinating equation in mind wllE'o I made mysecond purchase of T\VA warrants in November, 1963. Atthnt time T was diversified in several stocks. Bnt J sold theother stocks, and Pllt everything into TWA warrants. By do-ing that, Twas able to double all my money in four m~nths.