Although the Dow Theory has withstood the test of time and has been
most efficient in timing the market over the last one hundred years, it
remains one of the most misquoted and misinterpreted market-timing
methodology to this day. The Dow Theory is actually based on a series
of stock market writings written by Charles Dow (founder of the Wall
Street Journal) at the turn of the century, with a major emphasis on
valuations and the primary trend. After Dow passed away, William
Hamilton (Dow's understudy) continued Dow's writings. The Dow Theory,
as interpreted by William Hamilton, forms the basis of all technical
analysis today. Other notable mentions who wrote about the Dow Theory
were Robert Rhea, E. George Schaefer, and Richard Russell - the last
living great Dow Theorist.
Charles H. Dow
William P. Hamilton
Robert Rhea
E. George Schaefer
Richard Russell
The Dow Theory Today
It is interesting and amazing to note that not until Charles Dow
started compiling the Dow Jones Industrial and Dow Jones Rail Index and
started writing about the stock market a little over a hundred years
ago, stock speculation was regarded merely as a game for the rich or as
gambling for the brave. Sure, there were the tape readers, but the
majority of the public regarded Wall Street as a source of excitement -
the entertainment provided freely (unless you were on the wrong side)
by figures such as Cornelius Vanderbilt, Jay Gould, and the infamous
Daniel Drew.
In a series of stunning editorials for the Wall Street Journal at
the turn of the century, Dow laid out the foundation of his own theory
on the stock market. Among them were:
- The market is always to be considered as having three movements, all going on at the same time.
- The first thing to consider is the value of the stock in which
the speculator proposes to trade, the second the direction of the main
movement, and the third the direction of the secondary movement (i.e.
stocks fluctuate together, but prices are controlled by values in the
long run).
- There are three phases to both a primary bull market and a
primary bear market (not to be confused with the three movements
mentioned above).
- The formation of a "line" in the averages indicates accumulation or distribution
- The market represents a serious well-considered effort on the
part of far-sighted and well-informed men to adjust prices to such
values as exist or which are expected to exist in the not too remote
future.
The method of making money in stocks, according to Dow, was to study
basic conditions and exercise enough patience to capture the major
movements.
