After the technology stock crash of the early 2000’s America and the world focused their energy and funds towards real estate. In the beginning the growth was fueled by low interest rates and easier credit terms. It also was a better place to put money that we would have otherwise put into the stock market that was out of favor.
The technology bust woes were quickly replaced with the American dream. After several years of prosperity, the real estate market hit the mainstream. This booming market was not a secret. Most of the population of America knew that real estate prices were climbing fast. What kept the general public from immediately joining this market was reluctance and fear. Not until many more pass are we willing to make the trek on our own, which is a common characteristic of a herding animal. We look for leaders to lead us in new directions.
The real estate values in some areas nearly doubled in several years. Everyone was looking at real estate. Real estate flipping reality television shows dominated the airways. People bought properties that they clearly could not afford, since they felt they could sell it in a year or less for a profit.
The real estate market peaked and started to slide. We are now hopeful that it will come back. Real estate professionals and political powers are telling us that there is value in real estate. They are hopeful that we can get back to normal.
Charles Dow had theorized in his editorials, in the Wall Street Journal, that the stock market moved in stages. Most technical analysts strictly focus on the price movements, but Charles Dow had reasons for these movements.
Dow believed the first general market move up was the bargain hunters who identified an undervalued market. The market would then sell off some of the gain as some of the bargain hunters left the market looking for other bargains. Having made a strong move higher, the market is no longer a secret and general investors push the market even higher based on current growth and present profitability. Once the market has been saturated with general investors, growth in the value of that market is slowed and it will begin to shrink. Dreamers drive the last move higher. The last movement pushes well above its true or future value, typically driven by the main street investors, the general public. When the market is in this stage it is erratic and volatile. The market is erratic since the general public is unaware of what its value is; they are just playing the lottery. Volume starts to diminish since the market is running out of investors. Everyone who could or would invest has already done so.
After these three stages are up, the market moves down in a similar fashion. The first leg down is driven by profit taking from a stalling market. Then the market will attempt to recover unsuccessfully. This first recovery attempt is typically driven by the main street who missed the last move higher. Then the market will sell off again, typically this move down is the largest move. Selling in this leg down is driven by validated fear, rumors become reality. The market is falling on reduced growth and over capacity. Following this move down, the market will attempt to bounce again on fair market valuations again unsuccessfully. This last move down is investor’s surrendering; Main Street is getting out at the ground floor. Even though the market is fairly valued, too many dreams have been shattered and the thought of owning stock in this market makes the general public sick. Lastly the market finds a bottom and this is where the bargain hunters start the cycle over again.
The (Charles) Dow Theory was used with surprising success by William Hamilton from 1902 to 1929 when he predicted all but one market movement in the Wall Street Journal editorials he wrote. William Hamilton, using Charles Dow’s theory, predicted the stock market crash of 1929. He died just months before the crash. William Hamilton wrote a book called “The Stock Market Barometer” in 1922. Robert Rhea wrote “The Dow Theory” in 1932 clarifying William Hamilton’s book. “The Dow Theory” text is actually only the first third of the book, the remaining two thirds are reprints of William Hamilton’s editorials from the Wall Street Journal.
The Dow Theory is used by many technical stock market analysts today. Unfortunately the human behavioral reasons for the market moves are neglected. This oversight is probably why William Hamilton’s success has not been duplicated.
Main Street is always last to enter a market because of our reluctance and need for validation. Once on board, Main Street typically suffers the most because of our hope for normalcy. Hope is really just our unwillingness to let go of the past.
These typical behaviors are very “Normal”. We are reluctant on the way up and hopeful on the way down.