Profits in the Stock Market By H. M. Gartley

This Book is a MUST for all
Serious Stock Investors and Traders
Originally written in 1935, "PROFITS IN THE STOCK MARKET" had become a classic and a
collector's item.
H.M. GARTLEY was a renowned market technician. In 1980, be posthumously received the
MARKET TECHNICIANS ASSOCIATION ANNUAL AWARD for his contribution to technical
analysis.
In "PROFITS IN THE STOCK MARKET," Gartley shares his knowledge of such topics as—
MAJOR, INTERMEDIATE, AND MINOR TRENDS
TENETS OF THE DOW THEORY
TRIANGLES
MOVING AVERAGES
GAPS
VOLUME OF TRADING
BREADTH-OF-THE- MARKET
FIGURE CHARTS
SELECTING THE RIGHT STOCKS
V
PLUS 桮ARTLEY GIVES DETAILED
INSTRUCTIONS ON TRADING WITH PRICE
OSCILLATORS
Now for the first time, this valuable work is available in this hardbound edition, complete with all
of the original charts.
LAMBERT-GANN PUBLISHING CO.
BoxO Pomeroy, Washington 99347

Harold M. Gartley, 1899-1972
Harold M. Gartley has long been a well-known name in the field of technical analysis.
Beginning as a board boy and runner on Wall Street, he evolved into a master
technician whose techniques on trading the markets are still used today.
Gartley wrote many articles on the stock market hut his best work is considered to be
his book Profits in the Stock Market Of special interest to many traders is his chapter
"Volume of Trading" Gartley is said to have dune more work on volume than anvone
else.
Bum in 1899, Gartley grew up in Newark, New Jersey He attended the Newark
Technical School and then New York University where he received his Bachelor's
Degree in Commercial Science and 1m Master's Degree in Business Administration.
He began on Wall Street in 1912. Over the years he was a broker, a security analyst,
and a financial advisor. In addition, Gartle gave lecture tours and private courses on
the stock market that were attended by many of the prominent people of Wall Street.
Gartlev was one of the founders and an active member of the New York Society of
Security Analysts. He also founded the Wall Street Forum for younger analysts.
From 1947 (in, Gartley worked in the field of financial and shareholder public
relations. In his later years he was chairman of his own financial public relations Firm
until he retired in 1969.
Copyright 1935, 1963
by H.M. Gartley Copyright 1981 by Billy Jones
All Rights Reserved
including that of translation
into foreign languages
PRINTED IN U.S.A.
Published by Lambert-Gann Publishing Co. Box 0, Pomeroy, Washington 99347

INTRODUCTION
"Profits in the Stock Market" by H.M. Gartley was originally published in 1935.
At this time the book was contained in a three-ring binder. Less than 1000 copies were
originally sold.
I purchased the copyrights from Mrs. Gartley in 1979. After a long, tedious job of
getting this classic reprinted, "Profits in the Stock Market" is finally complete in this
hardbound edition.
All of the original charts are enclosed in a separate envelope which accompanies
the book. In order to retain authenticity, we have not redrawn any of the charts but
have made reproductions from the originals.
It may interest you to know that the Market Technicians Association, at its Florida
meeting recently, gave its annual award to H.M. Gartley for his contributions to the
field of technical analysis.
I believe you will find this book was worth waiting for.
Billy Jones, Publisher
Lambert-Gann Publishing Co.
Pomeroy, Washington, 1981

TABLE OF CONTENTS
I The Technical Approach to the Problem
of Stock Trading 1
II Charts-The Averages 35
III A Chart Portfolio 81
IV The Long Term and Major Trends 91
V The Intermediate Trend 111
VI The Minor Trend 155
VII The Tenets of the Dow Theory 173
VIII Tops and Bottoms, Supply and Demand Areas, Reversals 205
IX Triangles 225
X Trend Lines 237
XI Moving Averages 251
XII Gaps 281
XIII Net Change Oscillators 291
XIV Volume of Trading 299
XV Breadth-of-the-Market 319
XVI Figure Charts 327
XVII Comparative Group and Stock Studies
(Selecting the Right Stocks) 389
XVIII Profits in the Stock Market
(Summary) 425
Index 433

CHAPTER I
THE TECHNICAL APPROACH TO THE PROBLEM OF STOCK TRADING
REFERENCES
"Business and Investment Forecasting" R. Vance
"Business of Trading in Stocks, The" J. Durand
"Business Cycles: The Problem and
Its Setting" W.C. Mitchell
"Business Forecasting" L.H. Haney
"Business Statistics" J.L. Snider
"Economic Cycle, The" F.Y. Presley
"Financial and Business Forecasting" W.F. Hickernell
"Forecasting Business Conditions" R.N. Owens & CO. Hardy
"Forecasting Stock Market Trends" K.S. Van Strum
"Interest Rates and Stock Speculation" R.N. Owens & CO. Hardy
"Investment For Appreciation" (1936) L.L.B. Angas
"Practical Application of
Investment Management, The" D.C Rose
"Practical Business Forecasting" D.F. Jordan
"Principles of Investment" J.E. Kirschman
"Scientific Approach to Investment
Management, A" D.C. Rose
"Security Analysis" Graham & Dodd
"Security Price Movements" K.G. Karsten
"Statistical Methods" F.C Mills
"Stock Market, The" C.A. Dice
"Stock Market, The" S.S. Huebner
"Stock Market Profits" R.W. Schabacker
"Stock Market Tactics" L.L.B. Angas
"Stock Market Theory and Practice" R.W. Schabacker
"Tape Reading and Market Tactics H.B. Neill
"Truth of the Stock Tape, and the
Wall Street Selector" W.D. Gann
This Course, concerning the technical approach to
the business of trading in stocks, is not to be considered
as the philosophers' stone of the stock market.1
It does
not, by any means suggest a perfect solution to the
problem of stock trading which will enable every reader
to begin making handsome stock market profits as soon
as he has read the last word.
The average reader should leave the stock market
alone, or learn enough about its intricacies so that in-
telligent action can be taken in trading stocks. It is the
purpose of this Course to provide a means of learning
some of the important essentials in a study of the market.
The Primary Objective
It is assumed that the reader takes up this work
PHILOSOPHERS' STONE: AN IMAGINARY STONE, OR SOLID
SUBSTANCE OR PREPARATION, BELIEVED TO HAVE
THE POWER OF TRANSMUTING THE BASER METALS INTO
GOLD OR SILVER. WEBSTER.
with one primary objective, namely to make money by
using intelligent understanding instead of ignorant
gambling. The objective is easy to define. However, the
procedure of accomplishing it is far from simple, in that
it requires a detailed presentation of the factors which
appear to make, as well as the manner in which, stock
prices advance and decline.
Gambling or Speculation
There are two channels of approach which may be
taken in attempting to make stock market profits. We
may approach the problem as a gambling proposition, as
unfortunately (for them) all too many persons attempt to
do. Or we may approach the problem as a business
proposition, involving greater than usual risk, but paying
greater than usual profits to intelligent and patient
participants.
In suggesting the second and more logical of these
two approaches, it might be well to point out the dif-
ference. In a gambling operation, the participant depends
almost wholly upon chance (assuming that it

is honestly run), as one of two or more unpredictable
developments governs the determination of profits or
losses. In many gambling operations, the risk is reduced
to one of two chances, as both the maker and the
acceptor of a given wager assume exactly the same risk.
For the most part, intelligence is not the governing factor.
Every time a roulette wheel turns, there is an equal
chance that red or black will turn up.
Quite different from gambling is speculation,
wherein the participant depends (if he is to profit) upon a
reasonably precise knowledge of the conditions which
govern price trends. In speculation, the participant relies
upon changes in the price level (stocks, commodities,
services, et cetera), and not the mere operations of
chance. These changes have their root in some specific
cause. Many such causes may be studied and understood,
and thus reasonable judgment may be applied.
Unfortunately for most dabblers in Wall Street, the
gambling approach is most often used. The reason is
simple. The average person is too often governed first by
downright laziness, and secondly by the silly desire to
gain something for nothing. The intelligent approach,
wherein stock trading is counted to be a business,
requiring careful attention, robs the stock market of its
romantic appeal to many people. It takes most of the fun
out of it, if it becomes a job requiring patience and
application.
How futile it is to enter the stock market without
fully recognizing that profits can be only a matter of
chance, unless the market is patiently and carefully
studied. The market is a complicated mechanism.
Although man-made, and thus logically subject to in-
terpretation by other men, its complex workings require
a systematic study, if losses are to be prevented, and
profits made.
Haphazard or Systematic?
The difference between losses and profits frequently
hinges upon trading in a hit-or-miss fashion, or
systematizing one's speculation by studying the problem,
estimating the risks, selecting what appears to be the
most profitable opportunities, and adhering to a
pre-conceived policy.
The difference between the average investment
counsellor and the average customers' man in a broker's
office, is the fact that the former conceives a plan of
operation, based upon a systematic approach to all the
various angles of the problem including the requirements
of the customer, and consistently pursues this policy;
while the latter vaguely attempts "to make money."
Our Purpose
It is the purpose of this course to encourage the
reader to study the market and train himself to arrive at
his own decisions as to the probable future course of
stock prices, by using certain systematic methods which
have proved profitable to successful traders.
Matter has been collected from many sources. The
phenomena explained and illustrated represent many
years' work on the part of many market students. They
should be the means of saving the reader many hours of
personal research.
However, thumbing through the pages which follow
will not make-a-successful trader of any reader. To take
some single idea which is presented, because it seems to
have special appeal, and expect to make consistent
profits by using it alone, is a dangerous procedure.
Throughout the chapters which follow, it will be noted
that there are constant warnings that the various technical
phenomena suggested must be used, not singly, but as
part of a program involving many different angles.
Two Primary Problems
Reduced to its final analysis, successful stock trading
boils down to the matter of answering two questions,
namely:
1. WHEN to buy or sell; and
2. WHAT to buy or sell.
At first thought, and to hear some of the hangers-on
in the brokerage offices tell the story, making money in
Wall Street is all very simple, if you know "when to get
in and when to get out". Although, as we shall learn, the
solution to the "When" question is extremely important,
it is also a fact that a trader can be fairly right in judging
the reversals in the trends of stock prices, and yet make
only a fraction of the potential profits available, because
he is ignorant of systematic methods to assist him in the
selection of the right stocks.
The "When" question may be classified as a study of
trends. Except for short periods of time, usually ranging
for less than two weeks, stock prices have a habit of
going somewhere. During the vast majority of the time,
they are either advancing or declining. The successful
trader must be conscious of a change in trend. Thus a
continual knowledge of stock price trends is essential to
the successful timing of commitments.
The "What" question, on the other hand, depends
chiefly on observation of the specific characteristics of
individual stock price movements, and may be classified
as a study of comparisons.
The solution of each of these two problems, which
are about of equal importance, requires equal attention.
However, as the "What" to buy or sell problem usually
covers a much broader scope, it requires a greater
amount of time.
Usually, the "When" question, that is the timing of
commitments, is studied by observing the trends in the
market as a whole, or at least its major parts. The "What"
question, which is the selection of stocks, is observed by
studying small groups and individual issues.
Two Approaches
It is the custom of those interested in stock prices
trends to approach the solutions of these two primary

problems from two totally different angles, each of which
may be logically subdivided into the same two categories,
namely, "When" and "What". These two approaches are:
1. The FUNDAMENTAL approach; and
2. The TECHNICAL approach.
Fundamental Approach
The fundamental approach, which will be reviewed
only briefly, because this course concerns the technical
approach, may be classified in two general categories,
namely:
1. The ECONOMIC; and
2. The STATISTICAL.
The economic factors may be designated as those
which deal with the "When" to buy or sell question, while
the statistical factors are those which concern the "What"
to buy or sell question. The broad economic trends are
studied to learn the causes, and anticipate the reversals in
stock price cycles, while the statistical factors are studied
to determine the industries and particular companies
which appear more or less attractive at successive
intervals.
Economic Factors
Stock prices are the means by which investors and
traders appraise the effects of prosperity and depression.
During periods of prosperity, when the general level of
trade and industry is high, the prices of shares rise to
reflect that condition. Conversely in periods of
depression, the price level of shares falls to reflect the
converse condition. As the economic cycle goes, so goes
the trend of stock prices.
Primarily, the changes in the economic cycle are
caused by the relation of supply and demand for goods
and services. When these factors are more or less in
balance, the state of trade and industry carries on at a
level often vaguely termed normal.
The factors which make up the economic picture are
both foreign and domestic, and cover a wide range. The
average stock trader who has not had the special training
of an economic background, is naturally greatly
handicapped in being able to reduce the effects of
numerous enonomic changes to a practical working basis
for trading stocks. The economic facts which appear on
the financial pages of the metropolitan newspapers are
hardly sufficient for the purpose, because they are not
sufficiently comprehensive or related according to their
importance.
In combing the field of information available, the
author has found that the most complete presentation of
organized economic facts, in convenient graphic form,
appears in the publications of Economics Statistics, Inc.2
Because this service appears to merit the attention of
those stock traders who feel the need of concisely
summarized, but comprehensive economic data, which
have a bearing upon stock prices, the author presents, in
Appendix I of this
chapter, a brief discussion of this service, which is
believed to be worthy of the attention of the reader.
Unless some such source of organized information is
employed, the average stock market trader is probably
better off to leave the economic side of the fundamental
approach out of his calculations except in a very general
way.
Statistical Factors
The investigation ot the conditions of particular in-
dustries, and companies in such industries, is the method
which the fundamental student employs in selecting the
best mediums for investment or speculation. This study
requires trained consideration, a multitude of facts
concerning the management and operation of many large
and complex corporations.
To reduce the information to a concrete basis, from
which to make commitments, it is necessary that the
financial history of the various corporations be studied.
In addition, current changes must be constantly
scrutinized, and recognized relations between gross and
net earnings, profits and losses, assets and liabilities, as
compared with stock price trends, must all be carefully
considered.
A substantial part of this information can be conve-
niently charted. When the average trader starts out to
master this large volume of information, he soon finds
that an intelligent study of it is beyond his ability, unless
the pertinent information is very briefly summarized, and
the refined figures are constantly available.
The outstanding service which presents the majority
of the statistical factors, customarily used in connection
with judging the advisability of buying or selling
particular issues, is published by Investographs, Inc.3
With the idea of guiding the reader who is interested in
this branch of the fundamental approach, a description of
this service, with illustrative charts, appears as Appendix
II of this Chapter.
Fundamental Approach A
Study of Causes
The fundamental approach receives its name by virtue
of the fact that it is a study of the economic and statistical
factors, which are conceded to be the causes which
influence the rise and fall of prices of shares. Investment
trust managers and investment counsellors are constantly
pointing out to their shareholders and clients that the only
logical approach to the problem of successful investment
is naturally the study of the causes which underlie the
price changes of investment securities.
In recent years, particularly since 1927, it has been
found that time and again the fundamental approach has
fallen short of expectations, apparently because of what
might be called "poor timing" of buying and selling.
Frequently it has been found that a particular stock or
group of stocks, which from the fundamental facts
appears to be relatively over-priced, continues to rise;
2
70 PINE STREET, NEW YORK
CITY.
3
31 GIBBS STREET, ROCHESTER, NEW
YORK.

or conversely, a group or individual stock which seems
to be substantially under-priced refuses to rise for a long
period.
Investigation of numerous cases, wherein fun-
damental causes which were known required a con-
siderable time to show before they appeared in a
substantial change in the price of shares, has rather
clearly indicated that, in addition to the fundamental
factors, there are apparently indirect psychological fac-
tors which develop in the marketplace, to delay the im-
mediate effects of fundamental changes. Sometimes there
is a lag, and at other times there is a lead that is, on
some occasions price trend of shares will continue on
when fundamental factors obviously show that a change
has occurred, while at other times, the development and
knowledge of fundamental changes appears to have no
effect upon the price trend because such changes have
already been registered.
Examination of these variations shows that the
"willingness" to buy or sell, on the part of the majority of
persons interested in stock price trends, is not by any
means exactly timed to fundamental changes. In some
cases, stock price trends will anticipate or discount a
fundamental change. Thus, when the figures or facts of
the fundamental picture indicate that a change has
occurred, the stock price trend has already discounted
that change.
In other cases, when a fundamental change has not
been discounted, the price trend accelerates or reverses to
take such changes into consideration.
As fundamental factors which affect stock prices
have been more intensely studied by investment trust
managers and investment counsellors during the past few
years, many occasions have developed wherein, although
fundamental studies in the end prove to anticipate stock
price changes correctly, many purchases and sales based
upon fundamental studies have been early, with the result
that the most has not been made from the opportunities
which fundamental studies suggested.
In an effort to meet this problem, increasingly greater
attention has been given to the developments in the
marketplace, on the theory that the supply of and demand
for shares is a factor which the fundamental student must
take into consideration to improve the timing of buying
and selling based upon the fundamental approach. The
result has been that in the past few years, a study of stock
price trends themselves has received greater attention.
This branch of study has been termed the technical
approach.
Technical Approach
Thus, technical studies are beginning to receive a
place in the consideration of outstanding organizations
which make a business of studying investment securities,
particularly in connection with stocks.
BRIEFLY DEFINED, THE TECHNICAL APPROACH IS A
STUDY OF RECURRING PHENOMENA WHICH APPEAR IN THE
PRICE TREND AS A RESULT OF THE SUPPLY AND DEMAND
RELATION OF THE SHARES TRADED ON THE STOCK
EXCHANGES. ESSENTIALLY, IT IS A STUDY OF THE
EFFECTS
WHICH FUNDAMENTAL CHANGES CAUSE IN
THE PRICE TRENDS OF SHARES.
Just as the supply and demand factors in Industry,
Trade and Commodity prices are studied with the objec-
tive of determining the probable future course of
business activity and commodity prices, so the supply
and demand for shares are studied with the objective of
anticipating the price trends of stocks.
Comparatively, because there are so many more
stocks or individual units traded, the problem of studying
supply and demand for shares is far more complex than
the study of the supply and demand for agricultural or
industrial commodities.
As in the case of the fundamental approach, the
technical approach is divided into two general categories,
because the same two primary problems must be met
namely;
1. When to buy or sell; and
2. What to buy or sell.
The "When" Question
In the last analysis, the "When" to buy or sell
problem reduces itself to a matter of studying trends of
stock prices. The successful stock trader must be
conscious of whether an up or a down trend is in
progress, in order that the majority of his operations are
in line with the primary movement under way. Equally
important is a consciousness of the development of
reversals in trend. A study of price trends may be
designated as the abstract side of the problem.
Customarily, technical students study stock price
trends by means of observing comprehensive samples of
the market, which are considered to reflect the main
trends in progress. For this purpose "The Averages" are
studied (see Chapter II).
The determination of the direction and reversals of
trends, however, is only half of the problem. Its specific
side is also very essential.
The "What" Question
Although the technical student can arrive at useful
conclusions as to the trend by studying the averages,
practical trading in the end requires the purchase and sale
of specific shares. Thus, it becomes necessary to
determine which particular issues are more or less
attractive from time to time, in order to take the greatest
advantage of the timing of buying and selling, which
may be suggested by a study of the "When" question.
Essentially, the "What" question is a study of the
relative supply of and demand for shares of specific
companies. If the prices of all shares moved closely to-
gether (percentagewise), in any advance or decline, there
would be little need for this department of the technical
approach.
The wide variations in the fundamental factors which
have a bearing on each individual corporation, naturally
are the primary cause which requires constant selection
of issues, if the stock trader is to obtain the greatest
benefits from the risks he takes when he buys and sells
shares.

Fundamental and Technical Approaches Combined
Although some writers concerning technical studies
have chosen to take the attitude that the technical
approach is more direct than the fundamental approach,
and thus for the average trader represents the best means
of making greater profits, the author chooses to take the
stand that a neat combination of the fundamental and
technical approaches forms not only the best plan of
operation for the large investor, but is also the logical
method for the trader of moderate means.
Although it is true that a study of stock price trends
includes a reflection of all the fundamental forces, and in
addition, the psychological factors which, it has been
argued, can substantially affect the correct timing of
commitments, nevertheless there seems to be no
justification for assuming the attitude of an ostrich, and
blindly disregarding entirely the study of causes in favor
of a study of effects.
Practically all of the outstanding technical students
make a careful study, or at least are broadly conscious, of
the fundamental situation. Take, for example, the typical
statement which is noted below, from the writings of CJ.
Collins, dated September 28, 1935. Collins is noted for
the interpretation of stock price trends in terms of the
well-known Dow Theory.
Among those possible near-term
developments which would encourage
optimism as to the broader outlook for
business would be strength in railroad stocks.
The rail list has been sluggish since July 1933
because there has been no material expansion
in the demand for and the production of
heavy or durable goods. When this demand,
so necessary to basic or sustained revival in
this country, asserts inself, a heavy upturn in
carloadings will eventually follow. Well
ahead of the heavier traffic and larger rail
earnings, however, would be a vigorous rise
in prices of railroad shares in anticipation of
what is to come. The market, it must be
remembered, always looks ahead. It is
because of this relationship between the rails
and the durable goods industries, and the
market's habit of discounting, that the rail
average now takes on an added significance.
Technical Studies The
Direct Approach
Perhaps the chief reason why the technical approach
has been so much more widely used in recent years is
explained by the fact that the average trader finds it more
direct. Without the necessity of a broad economic
training, or the constant study of the financial position of
numerous companies, the technical approach, with a few
relatively simple studies, enables the average trader of
moderate or small means to be conscious of the
important changes in price trends, with only a fraction of
the effort and knowledge necessary in the case of the
fundamental approach.
Naturally, the technical approach also appeals to
many persons because the vast majority are inherently
lazy. Its relative simplicity, however, is perhaps its
greatest danger. When the average trader gets the idea
that a few technical studies, casually observed, are all
that he needs, he is usually well on the road to ruin, or at
least his capital account is on its way to substantial
depreciation. The trouble in most such cases is that the
trader fails to realize soon enough that, although the
technical approach is direct, and far more simple than the
fundamental, nevertheless, it has its complications,
demands constant study, and the application of
reasonable judgment.
However, the technical approach is ideally suited for
the trader of moderate means as the average man,
engaged in other business, cannot hope to make a com-
prehensive study of fundamentals on which to base the
buying and selling of shares.
Many persons who realize this, assume that the
logical procedure, then, is not to do any of one's own
thinking, but instead to purchase one of the many in-
vestment bulletins issued by various organizations which
cater to the demand for skilled opinion. Although such
bulletins, particularly those issued by the more reputable
services, can be mighty helpful in bringing to the
attention of the average person both the fundamental and
technical factors which appear to be influencing stock
price trends, such bulletins often fall down because the
subscriber is either unable to interpret them, or cannot fit
the suggestions made therein into his own speculative
problem, with any consistent success.
Thus, technical studies unquestionably can be of great
value in two ways: first, for that small group of persons
who like to do their own thinking, and secondly for the
vast group of lazy individuals who choose to buy their
judgment "ready-made". The latter group can employ
technical studies as a means of making advisory bulletins
more practically useful to them.
An examination of methods employed by successful
stock market traders, shows first that they are persons
who do their own thinking, and secondly, that their
success is not mere chance but instead is the result of
arduous and careful study of market conditions. It is a
sad commentary upon human nature that so many in-
dividuals go into the stock market with surplus funds
which have required considerable effort to amass, and
assume the risk of stock trading, which is far greater than
that in ordinary business, with only a fraction of the
knowledge which they would expect to employ on the
business or profession in which they make their living.
This is why stock trading, for most people, is gambling,
rather than speculating.
But to return to technical studies let us proceed by
looking into the materials used by the technical student.

The Elements of Technical Study
The greater simplicity of technical, as compared with
fundamental studies, is emphasized by the fact that the
materials of technical study^primarily are only three in
number, as follows:
1. Price
2. Volume, and
3. Time
As in other economic relations, the interplay of
supply and demand for shares creates the price level. A
preponderance of demand forces prices upward, while a
preponderance of supply depresses them downward. The
change in price levels is a more important factor than the
levels themselves.
Every change of price results from a meeting of
current supply and demand, wherein a transaction
consisting of a purchase and sale is consummated. The
aggregation of such transactions represents the volume of
trading. Such activity is the second factor used by the
technical student.
Time or duration of price movements is the third, and
least important factor. Its value in technical analysis
arises from the fact that a study of price trends over a
long period of time clearly indicates that economic
cycles, which are the foundation of stock price cycles,
seem to recur within very general time limits.
Of the three primary factors, price is by far the one
given most consideration. Gradually in recent years, the
more profound technical students have been examining
the relation of price and volume, in the hope of finding
some concrete laws which appear to govern price trends.
Although this branch of investigation has yielded some
useful results, it is fair to say that it is still in the
development stage, as is the whole art of technical
studies. Nothing which has been presented thus far,
appears to justify the conclusion that the study of
duration has suggested reliable laws.
Sources of Information
The information concerning these three primary
elements of technical study naturally arises on the floor
of the Stock Exchange, in the form of transactions which
are consummated each moment and is almost instantly
available to all interested persons at the same time. There
is no lag (except when the ticker is a few minutes late)
and there are no "insiders" able to have "advance
information". The usual sources of such data might be
listed as:
1. The stock ticker tape, which announces each
successive sale;
2. The official sheet, which lists the transactions
that appear on the tape. This is published at the end of
each day;
3. The newspaper tabulations which are sum
maries also taken from the stock ticker tape; and final-
ly
4. Special data services, which cull out the essential
technical information, and arrange it in useful form.4
Graphic Presentation of the Facts
As a means of facilitating the mental effort necessary
in studying the numerous data which the technical
student employs, charts have been conceived. As
conclusions concerning future price trends are so
dependent upon the previous course of prices, the
technical student, like the fundamental student except in
a different way, finds it essential to have before him an
accurate, up-to-date, historical picture of the course of
stock prices. As in any other human endeavor, pictures
more strikingly emphasize cold tabulations of facts or
figures.
Thus, charts relieve the memory of arduous work,
and leave the mind free to comtemplate the future.
The mention of charts makes it necessary to
distinguish between the familiarly known Wall Street
character, called the "chartist" and the genuine technical
student. Briefly, we may define the logically berated
chartist as a person who tries to guess the future trend by
insisting upon the fact that some current picture in the
price trend resembles the past, and will consequently
result in the development of a particular and specific
pattern which followed upon a previous occasion. His
approach is mechanical. To his way of thinking, the
market must conform to a preconceived imaginary
pattern, which he arbitrarily sets for it.
As yet, the "mechanical age" in the stock market has
not arrived. Thus, we see many lamentable characters
trudging from one broker's office to the next, with a few
much besmudged charts under their arms, suggesting to
any listener they can find, just exactly what the market is
about to do. When questioned, they have many
explanations as to why their previous judgments were in
error. Always it was some unforeseen event which
"changed the market".
The enlightened technical student, on the other hand,
attempts to use chart pictures which portray trends as
instruments which show him either that a current trend is
continuing, or that a reversal is developing. Unlike the
chartist, who attempts to forecast the extent of a
movement, and foretell the point of reversal, the
technical student realizes that the sequences of events,
which cause price changes, constantly vary. As these
sequences result in trends of varying lengths and
amplitude, the technical student is always alert to the fact
that it is only coincidence if one trend closely resembles
a previous trend.
The trained technical student operates on the premise
that his charts are a means of knowing where the market
is, as related to where it has been. On this foundation, he
builds, by various processes of deduction, a market
opinion which he is ready to alter whenever, and just as
soon as, the evidence of the cur-
4
THE MOST COMPREHENSIVE OF THESE NOW BEING
PUBLISHED IS THE GARTLEY DATA SERVICE (SEE
APPENDIX I, CHAPTER II).

rent day-to-day fluctuations seems to be indicating a
change which necessarily amends his previous judgment.
The informed technical student knows by long ex-
perience that there are no mechanical methods which may
be relied upon in precisely forecasting the extent of a
given trend, or the point or level at which that trend will
reverse. Although it is true that numerous recurring
phenomena have shown certain curious relations, which
provide some general estimates as to the probability of
the extent or duration of a trend, the learned technical
student knows that all such estimates must be used only
in partly verifying a general market opinion.
Thus briefly, we may define the differences between
a chartist and a technical student as follows: A chartist is
one who insistently expects the market to conform to a
preconceived pattern; while the technical student is one
who realizes that, although stock market history often
repeats itself, in a broad general outline, details are never
the same. Thus, in forecasting, the chartist dogmatically
concludes that a given development is to take place,
while the technical student, (knowing that he is dealing
with probabilities) suggests that a development is
probable, but will have to take place before it may be
considered certain. The chartist sets the course of his ship
toward the point of objective, and blindly proceeds on his
voyage. The technical student steers his course to keep in
fair weather, and avoid storms, while he is en route to his
destination.
It is obvious that there is a great misunderstanding of
the differences between mechanical chart trading, which
has never been demonstrated as profitable, and logical
technical study which has proved profitable. Take, for
example, the following quotation from page 609 of the
recently published book, Security Analysis, by Benjamin
Graham and David L.Dodd, of the Columbia University
staff. It reads as follows:
That chart reading cannot be a science is
clearly demonstrable. If it were a science, its
conclusions would be as a rule dependable.
This is a true statement, but begs the question.
Throughout their voluminous book, Messrs. Graham and
Dodd lay down, in rather complete fashion, certain
methods of analysis, which they suggest as the proper
approach to the selection of investment securities. The
procedure is termed "security analysis". Suppose we take
the above quotation, and substitute for the words "chart
reading" the words "security analysis". We then have the
following statement:
That security analysis cannot be a science is
clearly demonstrable. If it were a science, its
conclusions would be as a rule dependable.
The question is, can it be demonstrated that the
conclusions resulting from security analysis are, as a rule
dependable? If so, are they vastly more dependable than
conclusions arrived at by means of technical studies?
Until and unless the so-called
"security analysis" approach includes an understanding
of the technical situation, such conclusions inherently
overlook the important problem of timing of purchases
and sales of commitments, and therefore can never be
dependably successful.
Many sound companies could be selected by security
analysis in 1939, which have remained sound ever since
but that did not save buyers or owners of their shares
from sustaining losses of from 70 to 90 % of their capital
in the period from 1929 to 1932. This defect in security
analysis arises from the varying values placed in the
market upon identical fundamentals, depending upon the
general course of prices. With one or two rare exceptions,
a careful examination of the results obtained by purely
the fundamental approach to security analysis shows,
time and again, where poor timing of commitments has
cost investors dearly. Should the pot call the kettle black?
Next, Messrs. Graham and Dodd make the following
statement:
There is no generally known method of chart
reading which has been continually
successful for a long period of time. If it were
known, it would be speedily adopted by
numberless traders. Its very following would
bring its usefulness to an end.
The Dow Theory has been employed by numerous
traders and investors, with a high degree of success, for
40 years, and long before the present era of "investment
fund managers" who specialize in security analysis.
Other technical phenomena which have been employed
in more recent years, no older than many of the methods
currently in use by security analysis, give promise of
showing equally dependable correctness.
The argument that so many traders would adopt a
known successful technical method is trite, and enables
Messrs. Graham and Dodd to dispose of the careful
investigation of an intricate subject without the necessity
of looking into it. This argument also applies equally
well to the recommended method of security analysis,
suggested by these august gentlemen. If everybody could
successfully and continually pick the "sleepers", which is
one of the chief methods recommended by these writers,
such security prices would so quickly discount prospects
that only a negligible portion could profit.
In fact the difficulty with the "security analysis"
method is that in many cases those close to the
companies often skim the cream marketwise, by the time
the analysts get to analyzing. The technical student is
aware of the skimming when it is taking place, although
he may not know the why and wherefore.
The quoted Graham and Dodd remarks would, of
course, apply to a purely mechanical system (if there
were any). But technical studies in reality, like security
analysis, narrow down to judgment in

the end. The use of the term "chart reading" is un-
fortunate, not only because of the connotations which
have grown up around it, as suggested in the discussion
above, pointing out the difference between the chartist
and the technical student; but also because in true
technical studies, charts are not used as a crystal ball, but
merely to present advantageously the intricate data under
consideration.
Naturally, there is little reason for the proponents of
either fundamental or technical analysis to worry about
numberless traders speedily adopting the useful methods
employed in selecting securities and timing commitments.
At least 95% of those who enter the stock market
(including the readers of this work) can never be
stimulated to study it seriously and logically the
greatest proportion because they haven't the time, or are
simply too lazy. The market opinion of this 95% is at
heart the perennial human hope to make something for
nothing; and the results are, and will continue to be com-
mensurate with the reasonableness of the hope.
Technical Study an Art
As yet (and there is no immediate prospect of a great
change) technical study remains more of an art than a
science. It has few absolute laws. At best, it may be
considered as an empirical science, wherein judgment
plays an important part in successful performance of the
science. Possibly in years to come, as more patient
students apply actuarial methods, it may become more
like a science. But it is hard to conceive that the human
forces which interplay to make stock price trends, will
ever be so thoroughly understood that either the
fundamental or technical approach will be performed as a
scientific procedure comparing with the exact sciences.
However, for the average trader, technical studies
certainly offer a more logical method of trading the
market than the vague impressions of gamblers or the
intricate fundamental approach.
Errors of Optimism and Pessimism
Previously, we have stated that stock prices tend to
follow, or move coincidentally with the trends of trade
and industry. Also, it has been pointed out that upon
many occasions, the market tends to discount economic
changes. In addition, it has been stated that there are
psychological elements within the market, other than
purely fundamental causes which relate to economic
changes and the earning power of corporations.
Stated in other words we may say that there is a
speculative force always present in the market,
representing the efforts of those interested in security
price trends to discount fundamental
changes which they believe are occurring. Mob
psychology is also a factor with which to be reckoned.
This shows itself best in the fact that, as a general
proposition, the vast number of people interested in stock
prices, are constitutionally bullish, optimists. To them,
the up side is the only side.
Basically, the primary forces of the market might be
designated as:
1. The greed for profits, and
2. The fear of losses.
The action of these forces coupled with the common
human trait of going to excesses alternately causes errors
of optimism and errors of pessimism to be registered in
the price trend.
Thus arises the old Wall Street axiom that "The
public gets in at the top, and gets out at the bottom." The
public is here defined as the mass of persons of
moderate means, who take a small interest in the
market.
The rise in stock prices in the last quarter of 1928,
and the first three quarters of 1929 is an excellent
example of an error of optimism carried to the nth degree;
while conversely the decline from May to July 1932 is
one of the best examples in history, of an error of
pessimism. These illustrations apply to the primary
trends (bull and bear markets). The same type of
phenomenon is occurring constantly in the smaller
movements of the market.
Thus, we may depend upon the fact that any
substantial rise will be followed by a decline of some
extent, which might be termed the correction of part or
all of the error of optimism. Conversely, any extended
decline, we may expect, will be followed by some kind
of an advance, correcting the error of pessimism. It is
because so many persons who try to make money in the
stock market are either ignorant, or refuse to recognize
the importance of these fundamental facts that buying at
the top or selling at the bottom is so often the usual
procedure.
This course can be the means of preventing
numerous readers from blindly making these mistakes,
but it cannot make successful traders of all readers.
Personal Attributes of a Successful Trader
Although it is true that the average person if he has a
fair knowledge of current fundamental and technical
factors should be in a better position to make stock
market profits, such theoretical knowledge in itself does
not mean stock market profits. There is a great distance
to bridge between the theoretical and the practical.
The chief obstacles are human elements, which only
each individual can govern. Some few men are especially
gifted with the majority of attributes which can make a
good stock trader, while others lack so many of them that
it is hopeless for them to attempt

stock trading.
Among other personal attributes which a good trader
must have, the following are important:
1. He must be able to survey the outlook, and
reasonably appraise the future.
2. He must be able to plan a campaign to meet the
probable alternatives.
3. He must have the courage to act in carrying out
such a plan.
4. He must be able to change the course of his plan
when conditions make it necessary.
5. He must be willing to trade on both sides of the
market.
6. He must be able to withstand a barrage of misin
formation (inspired tips, et cetera).
7. He must be able to stay out of the market when
he is confused.
8. He must be able to limit and take a loss.
9. He must be able to let a profit run.
To the amateur who has not spent some years in
trading, these logical characteristics may seem easy for
attainment. The experienced trader knows how difficult
they really are.
Probably the average person has many of the
necessary characteristics. However, these may be dor-
mant because emotion gains the upper hand whenever
accumulated capital is subject to risk. Many of them can
undoubtedly be stimulated to rise above purely emotional
outbursts by systematic action. Increased confidence in
whatever one is doing tends to make the performance
more profitable. The stock market is no exception.
Certainly, a systematic study of the market teaches one
that he has the characteristics of a good trader, or if he
has not, and he is wise, it will teach him to quit the
market.
The Stock Market as a Sideline
As a national group Americans are better money-
makers than they are money-keepers. To the average
man interested in stocks, the stock market is an alter-
native or secondary business. Unfortunately, many
persons enter it as a mere gambling game. As they
choose to think of their stock market commitments as
chance affairs, there is no need for them to study the
market; and they should no more expect considerable
profits than the crap-shooter expects to "fade the crowd"
all of the time.
If the average man is to be successful, assuming that
constant profits are the measure of success, he must look
at stock trading as just as much of a business or
profession as that from which he earns his livelihood,
with this exception: it is usually more hazardous,
because instead of depending upon a reasonable profit,
for a product made or a service rendered, it depends upon
purely a change in the course of prices. Recognition of
this added hazard should be the special reason to pay
careful attention to one's stock market commitments, or
stay out of the market.
Naturally, if a man is to spend most of his time con-
ducting another business, his stock market operations
must receive a relatively small part of his available effort,
so that they do not make disproportionate demands upon
his time. On the other hand, he should not expose his
capital to the substantial risk of the market, without
employing common sense and reasonable foresight.
Common sense suggests an understanding of the
problems involved. Foresight suggests a knowledge of
current conditions. Both demand constant attention.
However, with a small chart portfolio (see Chapter
III), the average business man should expect to increase
the earnings on his capital, from the longer swings in the
market (the minor trend must be avoided), so that his rate
of income, instead of being 6% per annum might be from
12-18% . Most men think of the market as a place where
one should double one's capital every few months.
Although the risk is greater than in most business, to
expect any such profits as a consistent affair, is nothing
more than hoping for the impossible. If, in the course of
a year, two or three good trades can be made, which,
averaged over a five-year period, show a considerable
increase of the capital employed, let us say from 15-20%
a year, the average man should be satisfied.
If, by keeping in touch with financial affairs, and
studying the course of the price trends of a few important
stocks, this moderate accumulation can be made year
after year, in the period of a lifetime the effort is well
worthwhile. But this cannot be done by casually reading
the financial pages of a newspaper. Most readers of the
financial page actually get little from it.
Healthy Skepticism
Consciously or unconsciously, most of the news is
presented traditionally from the bullish viewpoint.
Financial editors know that the majority of their readers
are optimists. Thus when it comes time to write a
financial story in order to give the customer what he
likes the optimistic facts are usually presented first and
most prominently. Thus, the first thing the average
reader must guard against is jumping at conclusions.
Generalities on the financial pages are dangerous.
Headlines are likely to be quite misleading.
Economic events of great and broad importance do
not occur every day, and often develop when least ex-
pected by the average person. To be alert to these, and to
judge their consequences is the important thing in
reading the financial page. England goes off the gold
standard Roosevelt cuts the gold content of the dollar
Congress decides to investigate the Utilities, with a
view to regulating them these are the kind of
developments which are important.
Our introduction to the chapters which follow would
not be complete without some mention of systematic
speculation.
Have a Program and Adhere to It
Most necessary of all to the average trader of
moderate means is the importance of systematic

10
speculation. To have a program and steadfastly stick to it
is usually not a part of the customary approach to the
stock market. The market must be entered realistically,
with an understanding that greater than ordinary risks are
being taken, and that greater than ordinary profits should
accrue for these risks. The reason why a program is so
essential is because it permits the application of patience,
which is so lacking in the operations of most stock
market dabblers. Throughout the following chapters,
various attempts will be made to suggest systematic
programs of study, which can be of material value to the
average trader. The presentation of much of the material
has been arranged from the experience gained in ten
series of lecture courses, conducted by the author in past
years. Although the author cannot agree to answer all
communications, suggestions and additions for improve-
ment will be graciously and gratefully received.
NOW LET US PROCEED TO A BRIEF RESUME OF THE
MECHANICAL METHODS OF PREPARING CHARTS, AND THE
SELECTION OF CHART PORTFOLIOS FOR TECHNICAL STUDY.
THIS IS DISCUSSED IN THE FOLLOWING TWO CHAPTERS.

APPENDI
X APPENDIX
I
1
1
CHAPTER
1
THE ECONOMIC STATISTICS, INC., METHOD OF APPRAISING THE OUTLOOK FOR BUSINESS TRENDS
Security Prices and Business Trends
One of the essential tools of security analysts is an
accurate knowledge of fundamental business conditions.
Business and security price trends are inseparably related.
Although they may diverge temporarily, when the market
discounts a move prior to its occurrence, the trends of
business and security prices do not remain long out of
line. Earnings and earning prospects are the underlying
basis of security values. Business trends largely
determine earnings.
For years, there has been a basic need for an
economic service which would present and analyze
business data in a way that would reveal the true con-
ditions of the fundamental economic forces which
determine business trends. One prerequisite was that the
information be presented briefly, and in a manner simple
enough for the understanding of the average investor. It
also had to be available within the limits of his
pocketbook.
A Service Available
The service of Economics Statistics, Inc., conceived
to meet these requirements, deals with the impartial
analysis and presentation of economic facts. The basic
supply and demand conditions of industry and agriculture
are measured and graphically presented at short intervals.
Credit conditions are also analyzed. Interpretations
include allowance for the effect of political and social
developments. The analyses are prepared to show
whether fundamental conditions indicate an improvement
or otherwise an important part of the general
background which is essential in judging future security
price trends.
Methods of Analysis
Economic Statistics, Inc., analyze general business
conditions, individual industries, and major commodities
in terms of the balance or lack of balance between the
supply and demand forces. The entire business structure
and its many component parts are each and every one
continually going through a process of creating and
correcting supply-demand maladjustments. Supply and
demand facts mean little, unless they are arranged and
analyzed so as to reveal the true conditions in an industry
or commodity. Basic charts have been developed which
present graphically the supply and demand data in terms
of the balance or lack of balance between these forces.
This procedure is followed because the most im-
portant part of the task of forecasting centers is the
problem of arriving at an accurate knowledge of present
conditions. Ascertaining these facts constitutes the first
step in any of their analyses. This information enables the
trader or investor to determine which way the
fundamental economic forces are working.
The Basic Forces
The basic forces determining activity and price trends
are:
1. Supply and demand conditions of industry and
agriculture.
2. Price Relations
a. Cost price relationships determine profit
margins, which in turn regulate production.
3. Purchasing Power.
4. Money and Credit.
5. Political and social conditions influence the
effectiveness of these first four factors.
6. Unusual events wars, droughts, floods, et
cetera.
Purchasing power is important, in that it regulates
the general level of business. The trend of this index is
determined largely by industrial payroles and farm in-
come. The movements of these latter forces are con-
trolled by the supply-demand conditions and price
relationship of industry and agriculture. Supply and
demand factors basically regulate prices, which in turn
regulate supply, by affecting profits and profit margins.
The purpose of business (under the capitalistic
system) is profits. Their prospects either stimulate or
retard business. But profits depend upon the relation
between costs and selling prices. This brings us back
again to supply and demand conditions. // the supply and
demand conditions of industry and agriculture are strong,
prices will rise. This stimulates industrial production and
larger farm marketings, which in turn will increase
purchasing power through rising payrolls and farm
income. It is also necessary that the price structure (e.g.
the relation between industrial and farm prices) be in
balance; otherwise, the real income of one of these
groups will be reduced and thus decrease the ability of
one group to absorb the products of the other.
The next major consideration is to determine the
extent of the influence which money and credit factors,
political and social developments, and unusual events
may exert. These forces are important in that they can
either increase or decrease the effectiveness or intensity
of the more basic factors already discussed.
Money and credit are a very integral part of our
economic system. Conditions in this field have an im-
portant influence on business and security prices. From
the viewpoint of forecasting, there are three basic aspects
of money and credit. The first is the adequacy and
availability of credit for business needs. An adequate
supply of funds in itself will not stimulate business, but
will facilitate recovery once the basic forces are
favorable. The important point is that business men only
borrow when they can employ the funds profitably. No
matter how great the supply, or how low interest rates,
profit prospects will determine the demand.

12
APPENDIX
The second consideration is interest rates. These are
important in that they have a large influence on security
prices (especially high-grade bonds) and business costs.
Interest rates are determined by supply and demand
conditions in the money markets. Because capital knows
no home, and is very sensitive to disturbing conditions,
international conditions and developments have a large
influence on the money markets. From the viewpoint of
business forecasting, the third point, which has to do with
the inflationary and deflationary tendencies involved in
the use of credit, is by far the most important.
The danger of credit lies in its misuse. Credit is
merely debt. Its quality is determined by the financial
soundness and responsibility of borrowers. Credit in-
flation is merely a condition in which the people
generally, in relation to their ability to repay, have
over-extended their purchasing power through the use of
credit. Overborrowing destroys the financial soundness
(ability to repay) of individuals and naturally results in
losses to lenders. When lenders become uncertain over
the quality (safety) of a particular loan, they demand
payment.
The important point is that the ability to repay must
be destroyed by forces, not considered or known, when
the loan was contracted. When supply and demand forces
of industry and agriculture become seriously maladjusted,
as a result of over-supply conditions, prices decline and
production is reduced. Losses of jobs and lower
commodity prices precipitate smaller incomes and
preclude the ability of many people to repay loans. The
process of correcting the over-supply conditions is thus
intensified by the bad credit conditions resulting from the
over-extension of credit during the previous "prosperity"
period.
It should also be pointed out that, besides the infla-
tion of consumer credit, we can have the inflation of
speculative, investment (plany and equipment) and
government credit. The 1927-29 period provides ex-
cellent examples of the first two types. The
over-extension of investment credit occurs when the use
of credit for this purpose exceeds the rate of savings. This
inevitably leads to an over-expansion of industrial plant
and equipment. The result is an over-supply of industrial
commodities. Naturally, prices decline and eliminate the
profit margins of the weaker or high cost producers.
Receiverships, reorganizations and losses to security
holders are the consequences. When a government
inflates by borrowing to the point that its credit is
weakened, no matter what the funds are used for, the
situation is more dangerous. The basis of all credit money
is government credit, the destruction of which leads to
currency depreciation.
Political and social developments are very important
because of their psychological effects. They may either
stimulate or retard the effectiveness of the other basic
forces. If fundamental conditions are sound and
favorable to expanding business, a political or social
development that generates confidence will stimulate the
effectiveness of the natural forces of recovery. If an
CHAPTER 1
unsettling development occurs, naturally it will slow up
the recovery that is under way. The important point is
that an accurate knowledge of fundamental conditions
enables one to approximate the extent of the effects
which a political or social development may generate.
Unusual events (wars, droughts, floods, et cetera) are
factors that may or may not have an important influence
on business. The answer depends largely on the
magnitude of the event. Generally speaking, the effects
will be depressing on the territories involved, although
this is not always the case. For instance, the 1934 drought
reacted favorably on farm income. However, the
precipitation of unusual events ordinarily has favorable
effects on other territories or countries. One example is
that a wheat crop failure in Canada would sharply
increase the buying power of wheat producers in the
United States, the Argentine, et cetera.
All of the factors considered above are highly related
and must be analyzed from this point of view, and much
as it may be desired, there is no one series of data, or no
mechanical method that one can rely upon accurately to
forecast business trends. Success in this field is a matter
of careful study and understanding of the manner in
which the various basic forces influence one another.
Industries and Commodities
Analyzing an industry or commodity involves three
steps. The first and most important part of this analytical
procedure is the accurate determination of the existing
supply and demand conditions. The major question is
whether or not the industry or commodity is in a
favorable or unfavorable position. Their charts show this
information and also indicate which way the fundamental
supply and demand forces are tending. Charts 4 and 5,5
which accompany this Appendix, show vividly whether
supply and demand are in balance or out of balance in the
Steel and Automobile industries respectively. But these
pictures are only the starting point.
The second consideration is the outlook for demand
(consumption). This is essential because an industry or
commodity may be in a favorable supply-demand
position, but a decline in demand could easily turn a
good situation into an over-supply condition. Because of
the fact that industries are highly interrelated, it is
possible to anticipate the demand for a particular
commodity from the supply and demand conditions
which exist in the industries that consume the particular
product. In the case of industrial goods, the demand will
depend upon the activity in other industries. For instance,
the demand for steel is determined by such important
industries as Automobile, Machine Tools, Building, et
cetera. In the case of con-
5
CHARTS MENTIONED IN THIS DISCOURSE ABE MADE PART
OF THIS APPENDIX.

APPENDIX
sumers' goods (bread, soap, shoes, cigarettes), demand
will depend upon consumer buying power. The
Economics Statistics, Inc., index of purchasing power,
shown on Chart 2 of this Appendix, is an excellent
measure of consumer buying power.
The third step involves a consideration of the effects
which political, social or monetary developments are
likely to have. These factors can either work for or
against the basic supply-demand conditions. Good news
tends to affect the individual industry or commodity
favorably, while bad news has the opposite effect. If a
good supply-demand situation exists, and good news
occurs, the two will work together. Again the important
fact is that at any time an accurate knowledge of basic
conditions is essential to a correct anticipation of the
extent to which a new development will influence a
particular industry or commodity. The service of
Economics Statistics, Inc., does not make any pretense to
forecast political, social, or monetary developments.
When such events occur, their particular importance is
immediately discussed frequently in time for
subscribers to take advantage of them.
Practical Results
Many people will say: "The theory underlying the
work of Economics Statistics, Inc., is all right but do
the facts and interpretations which they supply lead to
profits?
The only logical answer is the impartial criterion of
results. For this reason, several of their key charts are
presented to indicate the real importance of an accurate
knowledge of basic conditions. These charts vividly
explain the fundamental causes of the important trends in
business. Without the help of any additional information
other than that shown in the accompanying charts, the
investor or trader would have been materially assisted in
foreseeing the future trend of business and security prices
in the case of every major turn which has occurred during
the last 15 years. To illustrate this, the conditions which
existed in each of the major changes in business, which
in turn had their effect on price trends during the past 7
years, are reviewed and, in conclusion, the present
outlook (October 1935) for the future is briefly
mentioned.
August 1929
Note from Chart 1 accompanying this Appendix,
which shows the composite supply-demand price posi-
tion of industry as a whole, that new supply began to
exceed demand in April, at (A); inventories started to
pile up, indicating a maladjusted condition. Chart 2
reveals that demand had been substantially exceeding
real income, or purchasing power, for 4 years (B to C).
This was inescapable evidence that the use of consumer
credit or installment selling had generated a demand far
in excess of real income, and led to an inflation of
consumer credit. Chart 3 indicated that the high levels of
raw material prices (one of the prime costs of
manufacturing) were far out of line with
13 CHAPTER
1
finished goods prices (E to F). It was evident that the
margin of profit of manufacturing concerns was
relatively small and decreasing. Manufacturers had two
alternatives: (1) Either they could increase operations
and sales, and thereby maintain their total profit at a
favorable level, or (2) they could lower production below
consumption, which by reducing inventories would
strengthen prices and increase their profit margins. The
latter was, of course, the sound economic step. They
chose the former. In May, June, July and August, the
new supply, as shown in Chart 1, notably advanced and
exceeded demand by a wide margin (shaded area).
Naturally, a burdensome inventory situation developed.
It was impossible to liquidate these inventories and still
maintain production at its current high levels. The fact
that the basic industries were in such a poor position
augured ill for the future. One glance at the Steel
situation, as shown in Chart 4, indicated that demand in
one of our most important industries was substantially
below production (G), and a severely maladjusted
condition existed.
The peak (H) on Chart 5 reveals that the Automobile
picture, another very important industry, was in an
equally poor position.
Obviously, a curtailment in industrial production just
had to take place. A decline in production meant a
corresponding reduction in employment. This meant
lower payrolls and in turn a smaller demand for farm
products. With supply being greater than demand, and
the outlook for purchasing power unfavorable, a decline
in industrial commodity prices was inevitable.
The agricultural situation was also seriously
maladjusted. In general, production had exceeded de-
mand, and surplus supplies were exerting a burdensome
effect on the farm price structure. Chart 6, portraying the
picture of wheat, reveals the conditions (I) that existed in
most of the important agricultural commodities. When
the farm situation was considered in light of the
anticipated decline in factory payrolls, and hence a
smaller demand for farm products, the outlook for farm
income was anything but favorable.
An accurate knowledge of these underlying condi-
tions during August 1929 surely indicated that all was
not "honey and roses." With supply and demand con-
ditions of agriculture and industry seriously maladjusted,
with profit margins declining, and with consumer credit
over-extended, the crash (which came in September) was
merely a matter of time.
Before there could be any basis for a sound recovery,
it was absolutely essential that the prime cause of the
declining prices and profit margins be removed. This
meant that large surplus quantities of farm and industrial
products had to be liquidated. Previously over-extended
credit conditions made the necessary deflation more
serious.
The Spring of 1931 - England Off Gold
During 1931, the real process of correcting malad-

14
APPENDIX
justed supply and demand conditions got under way (J,
Chart 1); but coinciding with this improvement, we had
the unfortunate experience of the devaluation of the
pound sterling in September 1931. Because so many of
the major commodities are financed in sterling, this
started another wholesale deflation procedure, and
intensified the commodity price decline in this country.
The depreciation of the British pound sterling made the
United States dollar overvalued in terms of purchasing
power parities. Either prices in the United States had to
decline or the dollar had to be devalued. Devaluation did
not come until early in 1933. Consequently, declining
prices continued to shut off the production of industrial
products, but government interference temporarily
prevented the liquidation of farm commodities.
The Summer of 1932
The supply and demand conditions continued to
improve and by the middle of 1932 the supply-demand
conditions of industry indicated that the recovery in
general business was very near (K, Chart 1). In the third
quarter of 1932, commodity prices started to rise, and
recovery was under way. At this time, the international
situation had cleared up considerably, and no longer
exerted a deflationary pressure.
But in the last quarter of 1932, the last weak link in
our economic system began to give way. The continued
decline in prices from 1929 had frozen the assets of the
commercial banks of the country, to the extent that they
could no longer meet the growing desire of the
depositors for cash. Although the supply-demand
conditions, price relationships and profit margins were in
a position favorable to recovery, the effective working of
these factors was vitiated by the ensuing bank panic. As
a result, business declined from September 1932 until
March 1935. A glance at Chart 1 indicates, at (L), that a
stronger natural basis for recovery was established than
that which existed in 1932.
After the Bank Holiday
The sharp recovery which took place in April 1933 is
an excellent example of a condition in which the basic
supply-demand conditions and psychological factors
worked together. However, flamed by inflationary fears,
manufacturers increased their operations so extensively
that by the close of April 1933 supply began to exceed
demand. In May, at (M), there was quite a wide spread
between supply and demand. In June, demand declined,
while production rose still further. Inventories had risen
rapidly, and were at an unusually high level. In view of
this condition, it was evident that commodity prices
should decline. It was also apparent, as is shown in Chart
2, that actual demand had been running in excess of
purchasing power (N), indicating the extent to which the
inflationary fear had affected industrial and consumer
buying. Referring to Chart 4, it was noticed that Steel
was in an unusually maladjusted condition (O).
Corrections were also needed in several other industries.
Under
CHAPTER 1
these conditions, business activity had to decline.
The Fall of 1933
Production was reduced, demand also declined, but
in October of 1933, purchasing power, as shown on
Chart 2, began to exceed demand (P) indicating that a
rise should take place in this latter index. Demand did
rise outstripping production, and inventories declined.
This strengthened commodity prices, which were further
stimulated by the government's gold-buying policy.
Profit prospects improved and production increased.
The Spring of 1934
In April of 1934 (Q, Chart 1), there was evidence
that production was again exceeding demand, and that
some correction would have to take place at an early date.
The stock market began to reflect this situation almost
immediately, but productive activity continued to
increase through June, at which time the supply-demand
situation of industry (R, Chart 1) was in almost as poor a
statistical position as was the case in July 1933.
The correction which took place during the summer
months of 1934 was a substantial one, and was aided to a
material extent by labor difficulties in various fields. The
textile strike was especially serious. From Chart 1, note
that demand began to exceed new supply in August (S).
This status continued through September. Referring to
the relationship which existed between purchasing power
and the composite demand, shown in Chart 2, it was
found that purchasing power had been sustained above
demand (T), indicating that there had been no forward
buying in recent months, and that the inflated consumers'
credit structure had been well corrected.
Furthermore, the outlook for farm income was en-
couraging, indicating that purchasing power should rise
further. In reviewing the individual industries, it was also
noted that the whole business picture had been well
corrected, and thus an advance in business and security
prices was indicated.
October, 1935
There has not been any unfavorable signal given
from the composite general business picture during the
recovery period, September 1934 to October 1935.
Throughout this period, demand has exceeded supply (U,
Chart 1), and inventories have declined sharply (V). The
basic forces underlying commodity prices are
exceptionally strong. Purchasing power is rising to new
peaks, exceeding demand (W, Chart 2). The outlook
continues favorable.

Profits in the Stock Market By H. M. Gartley

Profits in the Stock Market By H. M. Gartley

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