CHAPTER THREE Analyzing The List of Stocks

IN the last chapter we referred to Union Pacific stock as the most desirable stock for active trading.
A friend of mine once made a composite chart of the principal active stocks, for the purpose of ascertaining which, in its daily fluctuations, followed the course of the general market most accurately. He found Union Pacific was what might be called the market backbone or leader, while the others, especially Reading Railroad, frequently showed erratic tendencies, running up or down, more or less contrary to the general trend.

Of all the issues under inspection, none possessed the all-around steadiness and general desirability for trading purposes displayed by Union Pacific.

But the Tape Reader, even if he decides to operate exclusively in one stock, cannot close his eyes to what is going on in others. Frequent opportunities occur elsewhere. In proof of this, take the market in the early fall of 1907: Union Pacific was the leader throughout the rise from below 150 to 167 5/8. For three or four days before this advance culminated, heavy selling occurred in Reading, St. Paul, Copper, Steel and Smelters, under cover of the strength in Union.

This made the turning point of the market as clear as daylight. One had only to go short of Reading and await the break, or he could have played Union with a close stop, knowing that the whole market would collapse as soon as Union turned downward. When the liquidation in other stocks was completed, Union stopped advancing, the supporting orders were withdrawn, and the "pre-election break" took place. This amounted to over a 20 point decline in Union, with proportionate declines in the rest of the groups' list.

The operator who was watching only Union would have been surprised at this; but had he viewed the whole market he must have seen what was coming. Knowing the point of distribution, he would be on the lookout for the accumulation which must follow, or at least the level where support would be forthcoming. Had he been expert enough to detect this, quick money could have been made on the subsequent rally as well.

While certain stocks constitute the backbone or leadership position, this important member is only one part of the market body that, after all, is very like the physical structure of a human being.

Suppose Union Pacific is strong and advancing. Suddenly New York Central develops an attack of weakness; Consolidated Gas starts a decline; American Ice becomes nauseatingly weak; Southern Railway and Great Western follow suit. There may be nothing the matter with the "leader," but its strength will be affected by weakness among all the others.

A bad break may come in Brooklyn Rapid Transit, occasioned by a political attack, or other purely local influence. This cannot possibly affect the business of the large transportation stocks or transcontinentals, yet St. Paul, Union, and Reading decline as much as B. R. T. A person whose finger is crushed will sometimes faint from the shock to his nervous system, although the injured member will not affect the other members or functions of the body.

The time-worn illustration of the chain which is as strong as its weakest link, will not serve. When the weak link breaks the chain is in two parts, each part being as strong as its weakest link. The market does not break in two, even when it receives a severe blow.

If something occurs in the nature of a financial disaster, interest rates rise, investment demand falls, public sentiment or confidence is shaken, or corporate earning power is declining or are deeply affected - a tremendous break may occur, but there is always a level, even in a panic, where buying power becomes strong enough to produce a rally or a permanent upturn.

The Tape Reader must endeavour to operate in that stock which combines the widest swings with the broadest market; he may therefore frequently find it to his advantage to switch temporarily into other stock issues which seem to offer the quickest and surest profits. Therefore it is necessary for us to become familiar with the characteristics of the principal speculative methods that we may judge their advantages in this respect, as well as their weight and bearing upon a given market situation.

The market is made by the minds of many men. The state of these minds is reflected in the prices of securities in which their owners operate. Let's examine some of the individuals, as well as the influences behind certain stocks and groups of stocks in their various relationships. This will, in a sense, enable us to measure their respective power to affect the whole list or the specific issue in which we decide to operate.

The market leaders are, at the time of this writing - and for illustration only -, Union Pacific, Reading, Steel, St. Paul, Anaconda and Smelters. Manipulators, professionals and the public derive their inspiration largely from the action of these six issues, in which, except during the "war" markets of 1914-16, from forty to eighty per cent of the total daily transactions are concentrated. We will therefore designate these as the "Big Six". The Tape Reader should understand basic principles of the market. One being that leadership changes frequently. But for our purpose we will concentrate on this list.

Three stocks out of the Big Six are chiefly influenced by the buying and selling operations of what is known as the Kuhn-Loeb-Standard Oil group. Their four stocks are Union, St. Paul, Reading and Anaconda. Of the other two, Smelters is handled by the Guggenheims, while Steel, controlled by Morgan, is unquestionably swung up and down more by the influence of public sentiment than anything else.

Of course, the condition of the steel trade forms the basis of important movements in this issue, and occasionally Morgan or some other large interest may take a hand by buying or selling a few hundred thousand shares, but, generally speaking; it is the attitude of the public which chiefly affects the price of Steel common. This should be borne strictly in mind, as it is a valuable guide to the technical position of the market, which turns on the overbought or oversold condition of the market.

Next in importance comes what we will term the Secondary Leaders; for example those that at times burst into great activity, accompanied by large volume. These are termed Secondary Leaders, because while they seldom influence the Big Six to a marked extent the less important issues usually fall into line at their initiative.

Another group which we will call the Minor Stocks is comprised of less important issues, mostly low-priced, and embracing many public favourites.

Some people, when they see an advance inaugurated in some of the Minor Stocks, are led to buy the Primary or Secondary Leaders, on the ground that the latter will be bullishly affected. This sometimes occurs, more often it doesn't. It is just as foolish to expect a 5,000 share trader to follow the trading patterns of a 100 share trader, or a 100 share man to be influenced by buying and selling of the 10 share trader.

The various stocks in the market are like a gigantic fleet of boats, all hitched together and being towed by the tugs "Interest Rate," and "Business Conditions". In the first row are the Big Six; behind them, the Secondary Leaders, the Minors, and the Miscellaneous issues. It takes time to generate steam and to get the fleet under way. The leaders are first to feel the impulse; the others follow in turn.

Should the tugs halt, the fleet will run along for a while under its own momentum, and there will be a certain amount of bumping, hacking and filling. In case the direction of the tugs is changed abruptly, the bumping is apt to be severe. Obviously, those in the rear cannot gain and hold the leadership without an all-around readjustment.

The Leaders are representative of America's greatest industries - railroading, steel making, and mining. It is but natural that these stocks should form the principal outlet for the country's speculative tendencies. The Union Pacific and St. Paul systems cover the entire West. Reading, of itself a large railroad property, dominates the coal mining industry; it is so interlaced with other railroads as to typify the Eastern situation. Steel is closely bound up with the state of general business throughout the states, while Anaconda and Smelters are the controlling factors in copper mining and the smelting industry. This is how you should look at groups of stocks. Who is the Primary Leader in the group? Who are the Secondary Leaders and who the Minor issues? By classifying the principal active stocks we can recognize more clearly the forces behind their movements.

For instance, if Consolidated Gas suddenly becomes strong and active, we know it will probably affect Brooklyn Union Gas, but there is no reason why the other stocks should advance more than slightly and out of sympathy. If all the stocks in the Standard Oil group advance in a steady and sustained fashion, we know that these capitalists are engaged in a bull campaign. As these people do not enter deals for a few points it is safe to go along with them for a while, or until distribution becomes apparent. An outbreak of speculation in Colorado Fuel is not necessarily a bull argument on the other Steel stocks. If it were based on trade conditions, U. S. Steel would be the first to feel the impetus - then it would radiate to the others. In selecting the most desirable stock out of the Kuhn-Loeb-Standard Oil group, for instance, the Tape Reader must consider whether conditions favour the greatest activity and volumes in the railroad or industrial stocks. In the former case, his choice would be Union Pacific or St. Paul; in the latter, Anaconda. Erie may come out of its rut (as it did during the summer of 1907, when it was selling around 24), and attain leadership among the low-priced stocks. This indicates some important development in Erie; it does not foreshadow a rise in all the low-priced stocks. But if a strong rise starts in Union Pacific, and Southern Pacific and the others in the group follow consistently, the Tape Reader will get into the leader and stay with it. He will not waste time on Erie, for while it is moving up 5 points, Union Pacific may advance 10 or 15 points, provided it is a genuine move.

Many valuable deductions may be made by studying groupings of stocks. Experience has shown that when a rise commences in a Secondary Leader, the Leaders are about done in their advance and distribution is taking place, under protection of the strength in the Secondary stock and others in its class. Professional traders used to call these stocks "Indicators."

The absence of inside manipulation in a stock leaves the way open for pools to operate, and many of the moves that are observed in these groups are produced by a handful of floor or office operators, who, by joining hands and swinging large quantities of stock, are able to force their stock in the desired direction. For example, U.S. Steel is swayed by conditions in the steel trade, and the speculative temper of the general public, assisted occasionally by some insiders. No other stock on the list is such a true index of the attitude of the public, or the technical position of the market. Including those who own the stock out-right, and those who carry it on margin. Reports of the steel trade are most carefully scrutinized, and the corporation's earnings and orders on hand minutely studied by thousands. This great public rarely sells its favourite short, but carries it on margin until a profit is secured, or until it is shaken or scared out in a violent decline. So, if the stock is strong under adverse news, we may infer that public holdings are strongly fortified, and that confidence is strong as well. If Steel displays more than its share of weakness, an untenable position of the public is indicated. At this point public sentiment becomes intensely bullish and spreads itself in the low-priced speculative shares. Insiders in the junior steel stocks take advantage of this and are able to advance and find a good market for their holdings. Stocks find their chief inspiration in the orders for cars, locomotives, etc., placed by the railroads. These orders are dependent upon general business conditions. Consequently, the equipment issues can seldom be expected to do more than follow the trend of prosperity or depression.

We should introduce ourselves to the principal speculative mediums and their families, each of which, upon closer acquaintance, seems to have a sort of personality. If we stand in a room with fifty or a hundred people, all of whom we know, as regards their chief motives and characteristics, we can form definite ideas as to their probable actions under a given set of circumstances. So it behoves the Tape Reader to acquaint himself with the most minute of details pertaining to these market identities, also with the habits, motives and methods of the men who make the principal moves on the Stock Exchange chess board.