How a bull market starts? Wise words from another era.

The following excerpts are from a book I acquired last year.

Before applying rules for operating in a bull market it is necessary, of course, first to determine when stocks are actually in a bull swing. Most traders seem to become convinced of the genuineness of a movement in either direction only when it approaches a culmination.

The start of practically every bull market is indicated on one of two ways:

1) The orthodox indication is afforded when the market, after a protracted period of dullness and narrow fluctuations, breaks through the trading area, with increased activity on the advances..........To avoid mistaking a false move in a few easily manipulated stocks for a genuine bull market, this indication should not be accepted until the recognised leaders have entered new territory.

2) The other reliable indication of the start of an upward swing is afforded when after a period of declining prices or, less frequently, dullness, the market advances or refuses to go down following the receipt of bad news. It is not enough that these should be temporary strength..........the market finally advances above where it was before the news was received.

The above circumstances on the latter case read rather like the US market since early October 2011, which has rallied nearly 25% despite climbing what could be termed a huge ‘wall of worry’.

However, the interesting thing about these comments in this book is that they were not written on response to current events, or even any recent event, rather they were written in 1917.  Another extract from the book highlights the author’s second assertion:  

A striking case in point was afforded by the action of stocks on May 9 1917. The market had been going down steadily for nearly two months. On that date the front pages of the daily newspapers carried bad news from every quarter: The Russian Provisional Government has apparently collapsed, troops were deserting, anarchy reigned; submarine sinkings were on the increase and British statesmen were in the last throes of pessimism; the Anglo-French offensive on the western battle front had petered out; Congress was going to enact tax measures of a more drastic nature than had been expected; profits were to be restricted, prices fixed, huge bond issues were pending and it seemed certain that thereafter the United States would have to carry the financial and much of the military burden of the war. The worst that Wall Street had feared since our entrance into the conflict had apparently had come to pass.

The market greeted this array of unfavourable developments with a fairly steady opening; stocks then broke to lower levels, but late in the day rallied vigourously under the leadership of Steel, which had opened at 114. Its extreme low for the day was 112½ but it finally got above the opening figure, and followed by the munition, equipment and other steel stocks, kept right on going up for three weeks, until it made a new record high at 136½.

I can’t help thinking of the parallels with some of the headlines and general feeling around the market at the lows around the 3^rd/4^th October last year, when the SP500 put in a low, which had followed nearly 3 months of declines of around 20%.

• Moody's cuts Italy credit rating by three notches, Moody's downgrades Italy for first time in two decades.
• Investor Fear Over Morgan Stanley Sharpens – NYTimes.com.
• Goldman Sachs predicts “great stagnation” in the global economy.
• Eurozone crisis prompts global sell-off as Greek deal is delayed - US now in bear market territory amid fears banks face bigger losses in Greece.
• Wall Street protest movement spreads to cities across US, Canada and Europe.
• Occupy Wall Street protests reach Boston, LA, St Louis and Kansas City, and are planned in cities across US and abroad.
• Senior IMF official backs hike in Japan’s consumption tax rate

The book (a small publication of just 64 small pages) called ‘One-way pockets: The book of books on Wall Street Speculation’, was written under the pseudonym Don Guyon. It is an analytical study undertaken between 1915 and 1917 by the author, who worked for a large brokerage firm in New York, of the trading activities of a number of major accounts at the firm.

I think the ultimate lesson from reading this publication is the old adage, ‘The more things change, the more they stay the same’.