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49 Case II: The Mmor Market Drop Of Early 1937 Component 1 flattening across the top Component 2 hard down Component 3 hard up Component 4 bottoming and heading up Component 5 topping out to head down Component 6 topping out to head down One hard up, one bottoming to head up, one flattening across the top, two topping to head down and one hard down. So, the market wrent down. But it didnt go down very far, and then bounced right back up again. Why? Because by that time Components 4, 5, and 6 were due to bottom out. They did so and the market responded by bottoming also. Case III: The Big Drop of 1937 And 1938 Component 1 flat across the top Component 2 hard down Component 3 hard down Component 4 topping and heading down Component 5 topping and heading down Component 6 topping and heading down , There was simply nothing here cyclically to cause up action, and plenty to cause down action-and the bottom really dropped out from under! Case IV: The Up Market Of 1938 Component 1 hard down Component 2 bottoming and heading up Component 3 hard up Component 4 hard down Component 5 hard up Component 6 hard down Three down and three up. The ups won, because of the magnitude and longevity of Components 2 and 3, but the rebound was not nearly as furious as for Case I where everything was up. CaseV: The Market Rise Of 1942 Component 1 up Component 2 up Component 3 down Component 4 up Component 5 up Component 6 topping and down Four ups and two downs, so the market went up. And it continued to go up because down Component 3 soon bottomed and lent up impetus, while down
136 Why Slock Prices Change Component 6 was short-lived and small in amplitude and really only caused small wiggles anyway. QiseVI. The Spurt Of 1945 Component 1 hard up Component 2 hard up Component 3 bottoming and heading up Component 4 hard up Component 5 bottoming and ready to head up Component 6 down, but due to bottom soon With all this working for it, the surge was understandably huge. It was relatively short-lived however, since up Component 2 was not too far from a top-out at the time. Case vn; The Hard Down Market Of 1946 Component 1 up Component 2 down Component 3 down Component 4 topping out to go down Component 5 up Component 6 down With a preponderance of downs, the plunge was precipitous. Again short-lived however, because Components 3 and 4 contributed heavily to the fall and were of short enough duration that they soon turned, arresting the downside activity. Case VIH: The Big Up Market Of 1949 Component 1 up Component 2 up Component 3 up Component 4 bottoming to go up Component 5 up Component 6 bottoming to go up Here we have nearly an identical situation to that of Case I, and the market behavior is identical: i.e., the longest and steepest upward move since the one starting in 1935! So. Just as world events cannot explain market oscillations, it appears that cyclicality can and does. And the importance of this remarkable fact is especially apparent when we keep in mind the following: 1. Although our derived results apply stricdy to the DJ 30 Industrial Stock Average, data in the Appendix shows that many, if not all, individual issues behave similarly. 2. All these periodicities persist in time. They have been regularly bottoming out, going up, topping out, and going down again for years on end-completely independent of all the things that we normally think make stock prices change. 3. Sufficient periodicity spells semi-predictability, which in turn spells transaction timing aid!
Figure IX-4 is one of the most useful charts in the book, and is worthy of intense study. Here is seen the regularity, persistence, deviation from regularity, and manner of combination of most of the periodic oscillations that comprise stock price actions. SUMMAIUZING PRICE CHANGE CAUSES • You dont need to understand the causes of prke change in detail in order to profit by the price-motion model-but it helps when the unexpected occurs. • The traditional concepts of risk versus trading interval are out-dated by the existence of the price-motion model. • The determining element of price change is the human decision-making process. • DecKion-ntsking is complex and little understood. Emotions and unrelated influences often play a large part. The unluiowns in the process probably mask the true cause of price motion cydicality. • Althou the cause of cyclicality is tmknown, the nature of the effect is certain. • The implications of cyclicality include possible external influence of the decision processes of masses of investors more or less simultaneously. If thfa is fact, you must guard yourself carefully against the same Influences. • Cyclicality is probably not related to rational decision factors. • The lack of relationship between cyclicality and historical events is dear4;ut. More specific fundamental events cause wide differences in individual stock price action, and must always be taken into account. • There may be a link between gross national product and non<yclic price action in the market. True panics due to wars, currency devaluations, etc., represent buying opportunities if the cyclic picture is also ripe. • The extent of non-random cyclicality precludes any major contribution to price action by random events. • All price fluctuations about smooth long-term trends in the market (as represented by the DJIA) are due to manifestations of cyclicality.
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