Robert Rhea is known as one of the great Dow Theorists of the 1930's. It is said that he accurately called the bottom in the stock market in 1932. In Rhea's book, The Dow Theory, there is an idea about bear markets worth pondering. Rhea says the following:
Primary Bear Markets:-A primary bear market is the long downward movement interrupted by important rallies. It is caused by various economic ills and does not terminate until stock prices have thoroughly discounted the worst that is apt to occur. There are three principal phases of a bear market: the first represents the abandonment of the hopes upon which stocks were purchased at inflated prices; the second reflects selling due to decreased business and earnings, and the third is caused by distress selling of sound securities, regardless of their value, by those who must find a cash market for at least a portion of their assets.
With the news that we are now officially in a recession, I think that we have entered the second phase of the bear market according to Dow's Theory. No longer will stocks have the benefit of hope on their side. As the element of hope is out of the market, investors will no longer focus on price appreciation or earnings. Instead, the focus and emphasis for stock investing will be on dividends. If the company doesn't pay then the investor won't play. Touc.
Source:
- Rhea, Robert. The Dow Theory. Barron's. 1932. p. 13.
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