Wall Street Stock Selector

A Review Of The Stock Market With Rules And Methods For Selecting Stocks

W. D. Gann

• Publisher: Golden Springs Publishing
• Year: 2016
• eBook ISBN: 9781787200548
• Topic: Economics
• Subtopic: Investments & Securities
• Index: Economics

Wall Street trader and author W. D. Gann's third book, first published in 1930, is the follow-up to his acclaimed 1923 publication Truth of the Stock Tape (1923). It aims to provide traders and investors alike with seven more years of Gann's own experiences—including mistakes made and losses incurred—by offering further tried and tested rules and methods that will help traders to study and learn how to select the proper stocks to buy and sell with a minimum of risk.

CHAPTER I—NEW ERA IN STOCKS OR CHANGED CYCLES

During 1927, 1928, and the first half of 1929, there was much talk of a new era in the stock market and the great value of the Federal Reserve Bank in preventing panics. Many economists, bankers, large financial operators, and businessmen said that the day had passed when there would be panics caused by money conditions such as had happened in 1907 and previous years. At the same time these people were talking about the millennium in financial affairs and the stock market, but they seemed to have forgotten what happened in 1920 and 1921. The decline of 1920 and 1921 following the great bull campaign of 1919 was due to “frozen loans” and tight money. The Federal Reserve Bank was in existence at that time, but that did not prevent Liberty Bonds from declining to around 85 and stocks from selling to the lowest levels on averages since 1914 before the World War began. I quote an article which appeared on November 28, 1927, in one of our leading newspapers. This article was headed “Goodbye, Business Cycle.”

“The bugaboo of a ‘business cycle’ has lost much of its terror-inspiring influence. Scientific management seems to have overcome it. Years ago much was heard of recurring periods of prosperity and depression, and so-called prophets of business, mostly self-styled, were wont to discourse on business cycles, to the great alarm of industry and finance. These prophets proclaimed that business moved like the waves of the ocean and that the higher the waves the deeper the gulf between them. They said that the was true of business, and for a long time they had the country scared to their own considerable profit from their necromancy.

“But the spell has been broken and the pall of their prophecies has been dispelled. Businessmen in all lines are freed of the fetish. They realize that ‘the business cycle’ was a scarecrow. They know that there is no occasion for such a thing if business is held to an even keel. All that is necessary to so hold the rudder is common sense, co-operation and good judgment. There remain a few ‘cycle’ croakers, but their throats are hoarse from ineffective incantations, and business is going on in a highly prosperous way with no ‘cycle’ upheavals in lo, these many years, and with no threat of one. Business has seen greater boom times but never was on a more substantial basis, because businessmen have learned how.”

It is easy to see how confident this writer was, how he winds up his article by saying, “Business has seen greater boom times but never was on a more substantial basis because businessmen have learned how.” This writer was honest and conscientious; of that I have no doubt, but he was either ill-informed or incompetent. He had not gone far enough back in the past to know that history repeats in the stock market and in business.

Late in the fall of 1929 the worst stock market panic in history occurred and was followed by a slump in business, thus proving the theory that cycles do repeat, and while we may have been in a seeming new era, we were only repeating an old cycle or condition which always follows years after wars.

HOW TRADERS WERE FOOLED ON CYCLES

Many of the old-time veterans of Wall Street made just as bad mistakes in the 1921 to 1929 Bull Campaign as the rankest lamb.

Many people who had never studied the records of stock markets further back than 1901 to 1921—and some of them never reviewed them that far back—had the idea, from what other people wrote or said, that a bull market never lasted more than two years. This was the wrong idea which cost many traders heavy losses. After stocks advanced from 1921 to 1923, declined in 1924 and started up again after Mr. Coolidge was elected, and advanced in 1925, traders considered that according to the old rule the bull campaign was over and went short, with the result that they took heavy losses. They continued to fight the market at different times during the bull campaign, thinking that every time the market advanced to a new high level, it would be final top. Certain stocks continued to advance into 1929. Many of these veteran traders made the final mistake, which was worse than any of the first mistakes, of getting bullish at the end of the 1929 Bull Campaign and buying stocks, with the result that they suffered heavy losses in the panic which followed.

There are now over 1500 stocks listed on the New York Stock Exchange against about half this number in 1924. New groups have developed; new leaders have come to the front; new millionaires have been made under new conditions and old millionaires have been unmade. The old-time leaders of the stock market, who failed to change with conditions and applied the old rules, have gone broke. It is reported that Livermore measured the average swing of stocks in 1924 and 1925 and found them too high, according to rules he had previously used; then he went short of the market, lost a fortune, retreated, tried the market again in 1927 and again failed to properly gauge the right time to sell stocks and finally retreated and attacked in 1929, and made a fortune in the panic.

PANICS FROM 1814 TO 1929

Before going into details of the cause of this greatest Wall Street panic, it is important to review the other panics in the United States and in Wall Street over a long period of years and what caused these different panics.

Many factors contribute to the cause of panics. The principal and most important cause of all panics is high money rates, which are due to overextended credit and over speculation. Some of the other causes are undigested securities, both stocks and bonds, or low prices of commodities and foreign exchange, over trading both in business and the stock market, bank failures, exports and imports, price of silver, copper, iron and other basic commodities. If prosperity runs for a long time and stock market prices continue to advance over a period of years, the public becomes overconfident; moves in the markets and business reach the gambling stage. Everybody becomes optimistic and gets the gambling fever and continues to buy until everything is overdone and prices reach a level not warranted by business conditions or the earnings of the corporations of the various industries. When this stage is reached, money gets scarce; banks get loaded up with loans on stocks after a great rise and liquidation has to follow.

The panic of 1814 was due to poor export business and overextended loans. The 1818 panic was again due to money conditions. The banks were overextended. The panics of 1825 and 1826 were due to high money, high discount rate in England, and a decline in commodities, especially cotton. The 1831 panic was caused by high money rates, too rapid expansion in loans and overextended business operations. The panic in 1837 to 1839 was caused by over speculation and tight money conditions. Banks had to cease making specie payments. In 1839 the largest number of banks failed of any time up to that time. The 1848 panic was due to an increase in the number of banks and paper money in circulation and to low price of commodities, especially wheat, corn, and cotton, which this country at that time was largely dependent upon for prosperity. The 1857 panic was one of the worst in history up to that time. This was again due to too much paper money in circulation. For every dollar in gold and silver, there was about $8 worth of paper money circulating. There were a large number of bank failures and banks had to suspend payments. The 1861 panic was due to the Civil War. The 1864 panic was due to war, business depression and tight money. Stocks had also had a big advance, which had tied up a large amount of money in loans. In 1869 the panic was mostly a Wall Street panic. The “Black Friday” occurred in September 1869. This was due to a long wave of speculation, which followed the Civil War and stocks had advanced to extreme high prices. The money rate at that time was the highest of any time since 1857 and 1860. The 1873 panic was one of the worst panics after the Civil War and was due to a large extent to conditions brought about by the war. However, over speculation was one of the prime causes for this, also high money rates at that time advanced to the highest level since 1857.

On September 18, 1873, the failure of J. Cook, National Trust Company, Union Trust Company and other banks brought about serious financial conditions. On September 20, 1873, the New York Stock Exchange closed for the first time in its history and remained closed for 10 days until September 30. The rate of discount at this time was 9 per cent and banks suspended payments. The 1884 panic was due to over speculation in stocks; gold flowed out to Europe and reserves were very low. There were big failures at this time, among them the failure of Grant & Ward. Call money had been high for several years preceding this panic, reaching a high of 30 per cent in 1882, 25 per cent in 1883, and 18 per cent in 1884. The panic of 1890 was largely influenced by over speculation and high money rates. In 1889 call money reached a high of 30 per cent and in 1890 was up as high as 45 per cent. Commodities had reached the lowest levels since the Civil War, which helped to bring about business depression. The failure of Baring Brothers in London precipitated this panic. The 1893 panic was again brought about largely by high money rates. Call money rates in 1892 were up as high as 35 per cent and in 1893 as high as 15 per cent. Business failures were numerous due to low prices of commodities, principally wheat, corn, and cotton. The 1896 panic was due to the Bryan Silver scare and the fear that the gold standard would be disturbed. However, the low price of commodities had much to do with bringing about this panic, as general business conditions were poor and had been for several years. Call money rates reached 125 per cent, the highest rate up to that time since the Civil War. Average price for stocks reached extreme low on August 8, from which they started up, and after the election of McKinley, the McKinley boom followed, which was the biggest stock boom in this country up to that time. The 1901 panic occurred on the Stock Exchange on May 9, which was due to the Northern Pacific corner.

While stocks rallied after this panic, the general list continued to work lower for several years. In 1903 and 1904, the period of depression was due primarily to undigested securities and to Government attacks upon the railroads. Call money rates reached 15 per cent in 1903 and went back as low as 1 per cent in 1904, and did not get higher than 6 per cent during the year. Business conditions again improved in the latter part of 1904, after the election of Roosevelt, and a bull market followed in 1905 and 1906 when stock market prices reached the highest since the McKinley boom started. The 1907 panic, known as the “rich man’s panic,” was due to high money rates, over speculation, trust-busting and to the use of the “big stick” by the late Theodore Roosevelt and legislation against the railroads. Call money went as high as 125 per cent in October 1907, when the panic was at its height. Banks were forced to suspend payment of currency all over the country. The 1910-1911 panic or period of depression was caused primarily by the Sherman Anti-Trust Act and was known as a period of trust-busting.

The Standard Oil Company was ordered to dissolve and a suit brought to dissolve United States Steel Corporation, which later failed. Call money rates reached a high of 12 per cent in 1910. Stock prices reached the lowest levels in July. Money conditions were easier in 1911, the call rate failing to get above 6 per cent. The 1914 panic, which resulted in the closing of the New York Stock Exchange from July 31 to December 15, was due to the outbreak of the World War, but there would have been a panic and business depression in this country if war had not broken out, because commodity prices had reached the lowest levels for many years and business conditions were generally poor. Money rates had been high in 1912, call money reaching 20 per cent and getting as high as 10 per cent in 1913 and 1914. Europe was a large holder of our stocks at the outbreak of the World War and it was this liquidation that forced the New York Stock Exchange to close. Money and business flowed into this country as a result of this war and commodity prices advanced, which helped business here and a boom followed.

Market prices reached high in the Fall of 1916; speculation was overdone and call money reached a high of 15 per cent. Liquidation started, which resulted in the panic of 1917. This was due to over speculation, resulting from the war boom. After the war was over another wild wave of speculation broke out in this country in 1919, culminating in November, and was followed by a panicky decline. Money rates were as high as 30 per cent in October and November 1919, and 25 per cent in the Fall of 1920. The panic of 1920 and 1921 was due principally to “frozen loans” and decline in commodity prices. Merchants all over the country were loaded up with goods bought at high prices and banks were loaded up with loans.

After the panic of 1921 a long period of prosperity followed. Call money did not get above 6 per cent at any time from 1922 until 1928, and during 1924 and 1925 call money rates were down as low as 2 per cent. 1923 and 1924 cannot be considered as panic years either in Wall Street or in the stock market. They were simply periods of reaction, or resting periods, from which the big stock boom was resumed. Business conditions steadily improved after the election of Mr. Coolidge in November 1924. A long period of easy money and expansion in business helped to bring about the greatest bull campaign in stock market history, lasting for the longest period of time of any since the bull campaign which culminated in September 1869, and the McKinley boom from 1898 to 1906.

1929 Wall Street Panic—The cause of this panic was due to wild gambling not only by the people in the United States, but by people in the foreign countries. The whole world was gambling in the stocks of the United States. People were buying right and left regardless of price. Fortunes were made on paper in a short period of time. Everybody from the chambermaid to the multi-millionaire was in the stock market. People had ceased to work and were watching the stock ticker. New millionaires were being made in a short time. People had neglected their business because they thought it was easier to make money in the stock market. Never was there a time before in history where a speculative wave was more overdone than this one. Brokers’ loans continued to mount until they reached over 8 billion dollars. It has been conservatively estimated that the total loans on all stocks outstanding in the United States exceeded 30 billions of dollars. At the top, when high prices were reached, the total value of all stocks traded in on the New York Stock Exchange exceeded 100 billion dollars. Bond prices started to decline in 1928 and money rates started to advance, which was the first warning that the bull campaign was nearing its end. Call money rates were as high as 13 per cent in 1928 and went to 20 per cent in 1929. Warnings issued by the Federal Reserve Bank went unheeded.

The largest number of new securities were floated in 1929 of any year in the history of the New York Stock Exchange, all of which required large amounts of money to finance. The last stage of this greatest bull market had been so rapid that a reaction, an orderly decline, or an orderly wave of liquidation was impossible. When everybody had bought to capacity and started to sell, there was no one else who wanted to buy and a collapse was inevitable. The decline was the greatest in history and the public suffered the greatest losses. However, this was a rich man’s panic as well as the poor man’s, and the multi-millionaire suffered along with the “lamb.” Profits of 5, 10, 25, and 100 million or more were wiped out in the short period of less than 3 months. The big traders were just as unable to get out of stocks as the little fellow, because there was no one to buy the stocks that they had to sell. On September 3, the day that the market averages reached extreme high, sales were around 4½ million shares; then when the decline started on September 5, sales were around 5½ million shares. They had not been running above the 5 million-share mark for some time before the market reached top. On October 4, which was the bottom of a reaction, sales were 5½ million. On the first big panic day, October 24, sales were 12,894,000 shares; on October 29, the day of the greatest panic, sales were 16,410,000; on October 28, sales were 9,112,000; on October 30, 10,727,000; on November 12 sales were 6,452,000, and on November 13, the day averages reached bottom, sales were 7,761,000 shares. After this bottom, sales did not exceed 5½ million shares until April 3, when they reached near the 6 million-share mark again.

It is interesting to note the movement on averages from September 3, when the Dow-Jones 30 Industrials reached the high of 381, to October 4, the bottom of the first decline when Averages reached 325, a decline of 56 points in 30 days. A quick rally followed to 363 on October 11, up 38 points. On October 29, the Averages declined to 231, down 132 points from October 11 and 150 points from September 3; after a 2-day rally, Averages reached 273, up 42 points. On November 13 made extreme low at 199, down 74 points from October 31 and 181 points from the top of September 3. A rally followed to December 9, carrying the Averages to 263, up 64 points from the bottom. Then followed a decline to December 20, when the Averages reached 231, down 32 points from December 9. After that the reactions were small and prices worked higher from every reaction until April 17, 1930, when the Averages reached 294, up 95 points from the extreme low made on November 13, 1929.

HOW CYCLES REPEAT

The 1929 stock market panic was due largely to money conditions brought about by overextended loans and undigested securities. A study of conditions following the Civil War and a review of stock market prices will show any man that the conditions which have existed since the great World War have not been vastly different, nor has the stock market been vastly different. Before this bull market ended last August, talk was heard in every part of the country that this bull market had lasted longer than any in history and had fooled the wisest and best of men. The fact that it fooled everybody was true, but the fact that it had lasted longer than any other bull campaign was not wholly true, as the following review of past market movements will prove.

Railroad Averages—I have made up an average on railroad stocks from 1856 to 1896 in order that you may see where prices were before the Civil War started and what happened after the Civil War. In comparing conditions before and after wars, the best barometer and guide is the stock market. A bull campaign culminated in 1856 when these averages reached 96. A panic followed in 1857, carrying these same averages down to a low of 37. In 1858 the high was 79 and the low 59. In 1859 the high was 70 and the low 53. In 1860 the high was 70, the same as in 1859, and the low was 54, one point higher than 1859 low. In 1861 the high was 65 and in March the lowest record was made with the price down to 48. War was declared in April 1861, but you can see that stock market prices had discounted the war and started to advance soon afterwards. In June 1862, the averages crossed 70, which was the high level in 1859 and 1860, and in September crossed 79, the last high which was made in 1858. The bull campaign continued and in January 1863, the averages crossed the high level of 1856. The up trend continued to April 1864, when top was reached at 154. A fast decline followed and in March 1865, the low was again reached at 88, down 66 points in one year’s time. In October 1865, the averages rallied to 121. In February 1866, declined to 100. Advanced to 125 in October 1866, then followed a decline which culminated in April 1867, when the low was 104. This was a higher bottom than the low of 1866. From this low another big advance started and the final high was reached in July 1869, when the averages were top at 181, up 77 points from the low of April 1867. The last stage of the 1869 Bull Campaign was wild and active, with an advance of about 33 points on averages in the last three months of this final grand rush.

The bull campaign, which really began in March 1861, lasted until July 1869, subject to reactions just the same as we had in the bull campaign from 1921 to August 1929. The bull campaign from 1861 to 1869 was 8 years and 4 months. The bull campaign from August 1921, to August 1929, lasted 8 years. You can see by the records previous to the Civil Wa...

Table of contents

• Title page
• TABLE OF CONTENTS
• FOREWORD
• CHAPTER I-NEW ERA IN STOCKS OR CHANGED CYCLES
• CHAPTER II-TWENTY-FOUR NEVER-FAILING RULES
• CHAPTER III-WALL STREET EDUCATION
• CHAPTER IV-TIME CHARTS AND TREND CHANGES
• CHAPTER V-SUCCESSFUL STOCK SELECTING METHODS
• CHAPTER VI-HOW INVESTORS SHOULD TRADE
• CHAPTER VII-HOW TO SELECT THE EARLY AND LATE LEADERS
• CHAPTER VIII-STOCKS OF THE FUTURE
• CHAPTER IX-FUTURE FACTS AND DEVELOPMENTS
• AFTERWORD
• REQUEST FROM THE PUBLISHER