A Week for Bears

Along with an expanding economy and a growth in population, the continually rising bull market has been one of the phenomena of the postwar U.S. Last week, as stocks fell lower day by day, there were those on Wall Street who mourned its passing. Cried the New York Herald Tribune: BULL MART ENDS 10-YEAR REIGN. What lured the Tribune out on a limb--and prompted other hasty obituaries of the bull--was an oldtime market tool known as the Dow Theory, fathered by Charles H. Dow, a onetime broker and newspaperman, who founded Dow, Jones & Co. in 1882. The Dow Theory holds that when the Dow-Jones industrial average breaks through its previous low and is confirmed by the rail average penetrating its previous low, Wall Street is in the grip of a bear market. Both averages did just that last week (see chart), and the industrials closed the week at 609.79, off 22.21 for the week, although the loss was pared at week's end by a spirited rally.

The majority of Wall Streeters do not go along with the Dow Theory. To their way of thinking, last week's Dow signal confirmed only that stocks have been going down for some time, something that everyone already knew. Furthermore, they point out that the rails, which once accounted for more than 50% of the value of stocks on the exchange, have dwindled to less than 5%, cannot be taken as seriously as they were when the Dow Theory was instituted. The crucial breakthrough by the industrials and rails was caused in part by investors who sold in fear that the penetration would take place, thus helped bring on the very thing they feared.

Whipsawed. Dow theorists admit that though their signals are late, better late than never. But few market experts put much faith in hindsight. A classic example of the Dow Theory's operation came in 1929, when, after industrials had dropped 80 points, the Dow signal finally flashed. The market eventually went considerably lower, but by that time thousands of investors' accounts had been wiped out; 1937 saw a similar occurrence. Actually, anyone heeding the Dow Theory's buy and sell signals since 1929 would have been wrong 15 times out of 24. On those occasions, he would have sold low and bought high, an experience known in market parlance as "whipsawing." Said I. W. Burnham II, senior partner of Burnham & Co.: "I don't believe in the Dow Theory--and I don't know any rich Dow theorists." Nevertheless, the market's rough ride has cooled some of the enthusiasm over the business outlook. Some business news last week, in the light of over-optimistic expectations of two months ago, was not too encouraging. In addition to a drop in new orders (see below), carloadings and department-store sales fell, probably because of bad weather, and industry reported that January orders and shipments of machine tools dropped from December. But the news was not completely black. The auto industry, despite a cutback in production, reported that February sales of 480,000 cars were 6% above January, 14% above last February. More important, February's final third chalked up a 20% sales hike on a daily rate basis over the second third.

Buying Growth. Balancing the good news against the bad, many Wall Streeters felt that the market had gone too high too fast toward the end of 1959, could stand the current correction, which may carry it even lower. But the correction was not the start of an old-fashioned bear market that would sweep all stocks down. Most analysts thought that the market was feeling for a firm base from which to rise again. Investors, notably mutual funds, were still concerned about the fact that stock yields continue to be well below yields on bonds, supposedly were not buying for this reason. But the big surprise of the market was that the "glamour" growth stocks, e.g., Polaroid, Ampex and Texas Instruments, selling as high as 50 times earnings, v. 15 times earnings for blue chips, had held up better than other stocks during the slide and were still close to their peaks. Many other specialty stocks whose growth potential has been recognized by investors also gained during the drop.

To Wall Street, all this meant that Wall Street's bull was far from dead, was only being choosy about the kind of hay it eats. Investors were still willing to pay high prices for stocks in rapidly growing industries, even though their earnings at present were comparatively small. On the other hand, growth seemed to have temporarily gone out of the blue chips, which have had a great rise, quadrupling in the last ten years. Many investors felt that the new growth period for blue chips would have to wait for a few years until the children born in World War II forced a great new expansion in demand.

This file is automatically generated by a robot program, so reader's discretion is required.