The observer of market conditions soon comes to know that there are two general classes of minds whose operations are reflected in prices. These classes might be named the “impulsive” and the “phlegmatic.”
The “impulsive” operator says, for example, “Conditions, both fundamental and technical, warrant higher prices. Stocks are a purchase.” Having formed this conclusion, he proceeds to buy. He does not try or expect to buy at the bottom. On the contrary he is perfectly willing to buy at the top so far, provided he sees prospects of a further advance. When he concludes that conditions have turned bearish, or that the advance in prices has overdiscounted previous conditions, he sells out.
The “phlegmatic” type of investor, on the other hand, can hardly ever be persuaded to buy on an advance. He reasons, “Prices frequently move several points against conditions, or at least against what the conditions seem to me to be. The sensible thing for me to do is to take advantage of these contrary movements.”
Hence when he believes stocks should be bought he places an order to buy on a scale. His thought is:
“It seems to me stocks should advance from these prices, but I am not a soothsayer, and prices have often declined three points when I felt just as bullish as I do now. So I will place orders to buy every half point down for three points. These speculators are a crazy lot and there is no knowing what passing breeze might strike them that would cause a temporary decline of a few points.”
Among large capitalists, and especially in the banking community, the “phlegmatic” type naturally predominates. Such men have neither the time nor the disposition to watch the ticker closely and they nearly always disclaim any ability to predict the smaller movements of prices. They are entirely ready, nevertheless, to take advantage of these small fluctuations when they occur, and having plenty of capital, they can easily accomplish this by buying or selling on a scale.
As a matter of fact, the market is usually full of scale orders, and the knowledge of this and of the way in which such orders are handled is decidedly helpful in judging the tone and technical position of the market from day to day.
The two types of operators above described are always working against each other. The buying or selling of the “impulsive” trader tends to force prices up or down, while the scale orders of the “phlegmatic” class tend to oppose any movement.
For example, let us suppose that banking interests believe conditions to be fundamentally sound and that the general trend of the market will be upward for some time to come. Orders are therefore placed by various persons to buy stocks every point down, or every half, quarter, or even eighth point down.
On the other hand, the active floor traders find that, owing to some temporary unfavorable development, a following can be obtained on the bear side. They perceive the presence of scale orders, but they think stocks enough will come out on the decline to fill the scale orders and leave a balance over.
To put it another way, the floating supply of stocks has become, at the moment, larger than can comfortably be tossed about from hand to hand by the in-and-out class of traders. The market must decline until a part of this floating supply is absorbed by the scale orders which underlie current prices.
These conditions produce what is commonly called a “reaction.” Once this surplus floating supply of stocks is absorbed by standing orders, the market is ready to start upward again. If the general trend is upward, far less resistance will be encountered on the advance than was met on the reaction; hence prices rise to a new high level. Then profit-taking sales will be met, on limited or scale orders at various prices, and as the market advances the floating supply will gradually increase until it again becomes unwieldy and another reaction is necessary.
Eventually a level is reached, or some change in conditions appears, which causes these scale buying orders to be partially or entirely withdrawn, and selling orders to be substituted on a scale up. The bull market will not go much further after this change takes place. It has now become easier to produce declines than advances. The situation is the reverse of that described above, and a bear market follows.
Commonly there is a considerable period around top prices when scale buying orders are still found on declines, but profit-taking sales are also met on advances, so that the market is kept fluctuating within comparatively narrow limits for a month or more. In fact, it is likely to be kept on this level so long as public buying continues greater than public selling. This is sometimes called “distribution.” A similar period of “accumulation” often occurs after a bear market has run its course, and before any important advance appears.
A close watch of transactions, or a study of continuous quotations as published in certain newspapers, often enables the experienced trader to discover when the most important of these scale orders are withdrawn or reversed.
A bull market which is full of scale buying orders encounters “support,” so-called, on declines. Bears are timid about driving down prices, because they are continually “losing their stocks.” They say that “very little stock comes out on declines”; hence there is a certain appearance of caution in the way the market goes down, and the activity of trade shows, in a broad way, a falling off at lower prices. On the advances, however, a following is obtained and activity increases.
Toward the end of the bull market a change is noticeable. Prices go down easily and on larger transactions, while advances are sluggish and opposition is met at higher levels where profit-taking orders have been placed. The very day when scale buying orders in a stock are withdrawn can oftentimes be distinguished.
In a bear market, “pressure” appears in place of “support.” The scale orders are mostly to sell as the market rises. Only a small following of purchasers is obtainable on advances, hence the activity of business, in a general way, falls off as prices go up. The end of the bear market is marked by the reappearance of “support” and the removal of “pressure,” so that prices rebound quickly and sharply from declines.
The common assumption is that this “support” or “pressure” is supplied by “manipulators.” But it is quite as likely to result from the scale operations of hundreds of different persons, whose mental make-up prevents them from buying or selling in the “impulsive” way.