Second Wave

The stock market, still quaking with post-election jitters, kept right on falling last week. In two days, 4,360,000 shares changed hands; prices tumbled to their lowest point in eight months. At week's end the Dow-Jones industrial average had fallen another 4.6 points to 174.32. In the post-election drop of almost 16 points, $6.2 billion in paper values had been drained from shares listed on the New York Stock Exchange. But this week the market perked up, rose two points.

For some Wall Streeters, last week's drop was more portentous than the actual losses. On the way down, the industrial and railroad averages had broken through their low points of Sept. 27, the last big decline before the pre-election rise. Last May, when both the industrials and rails broke through their previous high marks, followers of the famed Dow theory had proclaimed the "confirmation" of a bull market (TIME, June 14). Now that the same averages had broken through their previous bottoms, did this mean that the bull had been displaced by the bear?

What's a Signal? The Dow theorists could not agree. Chicago's Justin Barbour, who interprets the Dow theory for the Chicago Journal of Commerce, said the break-through did confirm a bear market. But in Manhattan, Thomas W. Phelps, of Francis I. Du Pont & Co., another leading Dow exponent, thought otherwise. The industrials and rails, said Phelps, would have to break their lows of last February (when the industrials were at 164.07 and the rails at 47.48) before a positive bear "signal" would be given. The New York Herald Tribune's financial editor, C. Norman Stabler, who thinks the Dow theory is a lot of nonsense, hooted: "Its recent history indicates that to have traded exactly contrary to the theory's signals would have been the only way to make a profit."

Many a professional specialist had begun to wonder whether the Dow theory, a useful barometer in less stormy times, had not outlived its usefulness. Nowadays the market is subject to more unpredictable political and economic pressures and plain frights than it felt in the years when the theory was being worked out and "proved." For example, only a month after the theory signaled a bull market in May, the Berlin blockade sent prices skittering down again, although business got better & better.

What's a Bargain? Last week, when bear growls could be plainly heard, the bond market was turning perversely bullish. Ordinarily, rising bond prices have preceded bull markets (as bond prices go up and their interest yield declines, common stocks grow more attractive). Last week, with stocks falling, long-term Treasury bonds, which set the bond market trend, rose above their Federal Reserve support-price for the first time since July.

The economy was still running in the opposite direction from the market. The steel industry in October broke all war or peacetime production records, turning out 7,973,416 tons. Employment (at 60,134,000) stayed at its boomtime high. And corporations with record earnings voted extra dividends; there were 44 last week. Yet many stocks were selling for so much less than the actual worth of their companies that stockholders would get their money back if the company passed out only the cash in its till.

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