Interesting how we really never did get this day of reckoning or “capitulation”. Instead a steady flow of relatively good news has spurred the major average up near 20% in a matter of weeks. With several weeks on a roll we have heard (not from all, but a large majority) from public officials, investment professionals and financial press that we may have seen the worst of this economic crisis.

If it pays to be contrarian then don’t you lose if you are part of the mainstream? Could the market be doing the same as capitulation but on the upside, panic buying for their jobs? Remember Wall Street suffers long term in a bear market.

President Herbert Hoover (31rst President of USA 1929-1933) on May 1, 1930 stated that United States was not through all its difficulties but he believed that United States had been through the worst (taken from The World in Depression 1929-1939 by Charles P. Kindleberger)

Red Circle Indicates End of April Beginning May 1930 Dow Industrial Average

It is Funny how interpretation can differ from one person to the next. If you read this book with the notion you will learn a system of predicting the US markets, then you will probably come away with that (not necessarily accurately). The Dow Theory does include a method, but it also includes a reason for the method. Charles Dow did not use his theory to predict the market, more to determine where we were in a specific cycle. He used charts to confirm where we were on the economic map. It is widely accepted that we follow a relatively predictable economic path since we maintain a monetary policy (i.e. if A happens then B is our response and C is typically the result).

You should understand that Charles Dow never used his theory nor did he ever represent it as some sort of system to predicting the markets. My interpretation is that William Hamilton was successful with the theory because he used it to plot the economies location, and then used the relatively predictable economic map (cycle) to determine what was next.

I use technical analysis in my investment practices, but more for a “where are we now” purpose and not an eight ball in decision making. It would seem to me that sometimes technical analysis is a self fulfilling prophecy, the more who believe it the more you have a movement (at least in the short term). For that reason alone I feel you cannot disregard it but understand how one of the Fathers of Technical Analysis viewed it.

I would definitely recommend reading an unabridged copy of “The Dow Theory” by Robert Rhea. The book is only about 100 pages with an additional appendix of 100 plus pages of reprinted articles from William Hamilton’s Wall Street Journal column. The Dow Theory to me is definitely one of the best ways to gauge the market sentiment and where we are in the economic cycle.

When viewing an economic crisis over history many economists strictly view the flow of money, whether it is spending, lending or monetary. My view is somewhat more of the psychological viewpoint of the masses. If we strip out the dollars and cents of a crisis what we are left with is the acceptance of a failed endeavor.

We as individuals are able to handle extremely difficult stresses in life by going through stages of acceptance to finally moving on. As pointed out by Gustave Le Bon in The Crowd the individual is typically smarter than the crowd. As an individual we cope much faster with a crisis then the masses. Since this crisis is affecting so many people it makes it harder as an individual to go against the irrational actions of the crowd and move toward the somewhat obvious solution.

So instead of acting out of anger, we need to think as individuals and act rationally. If everyone thinks as an individual rather than part of the mob we would make more progress toward the resolution of this difficult time.

Unfortunately, if history is any indication of the future, people will jump on the bandwagon and the resolution will be prolonged and full of irrational behavior. Interesting that it is not the economic factors that determine the outcome, it is the human action.