Russell Comment – I knew Justin Barbour back in the 1960s. He was a most unusual fellow, and an avid stock market student. He was also a firm believer in the Dow Theory. The remarkable piece below was written three months after the extreme low for the market (the low was struck in April 1942).

The psychology when this was written was black-gloomy, and indeed at the time it seemed a very real possibility that the Allies would lose the War. The furthest thing in anyone’s mind was that in mid-1942 a vicious bear market was ending and a new bull market was beginning. But Justin Barbour got it right -- he got it very right.

From mid-1942 to the bull market peak in 1946 the market put in one of the greatest breadth performances in history. Almost every stock that was tradable moved up from the depths of 1942.

Read this “long-lost” document carefully, because I consider it one of the greatest market calls in Wall Street history.

The movements of the market are susceptible to wide analysis. In addition to extent and duration, movements can be judged by their characteristics and phases. The initial phase of a major move - bull or bear – develops at an extreme and invariably at a time when the prevailing news is in decided conflict to the new move.

The second phase coincides with the recognition of the new move and the visibility of developments justifying it. The confirmation of the change in major trend usually marks the division between the first and second phases. The third phase is the period of universal recognition of both the major trend and the conditions responsible for it. It is usually a period of increasing volume and the time when one feels confident in as well as the desire to participate in and profit from the established trend.

It is easy to apply these phases to the markets of the past. The first phase of the bear market was present in the Fall of 1939 when business, earnings and dividends were increasing because of the war in Europe. At the time it was hard to understand why the averages failed to continue their advance in the face of such economic conditions. The second phase came with the invasion of the low countries and the panic decline in mid-May, 1940.

The second phase continued until the surprise attack on us at Pearl Harbor brought us both into the war and the beginning of a complete war economy. It was at this point that the third and final phase of the bear market set in, the period in which so many developments – adversity, priorities, price ceilings, rationing and taxation – made it so easy to justify the sale of securities.

In the transitory period, there may be an overlapping of the third or final phase of one major movement and the first phase of the next major move. While temporarily there may be a question as to the point at which the third phase ends and the first phase begins, in the current instance it can be said that the bear market has been in its third and final phase a long time and that the characteristics of the first phase of a bull market are present.

Conditions of Change

These characteristics as before mentioned are: (1) an extreme point – the lowest in many years; (2) the seeming immunity of the market to the prevailing news; (3) the extreme low volume of trading; and (4) the in-gear advance that is developing in the averages.

On April 28 the industrial average was at its lowest point in seven years; the rail average close to the low of two years and in the low area of nine years. One group, the utilities, was at their lowest point of record. An extreme, out of which the first phase develops was and is present.

For at least two weeks the market has appeared to be immune to very depressing news. Except for the initial day of decline the averages have moved sidewise and advanced in the face of a major military defeat. Neither dividend reductions nor the proposed tax bill appear to depress stocks now. Demand prevails where the impulse is to sell.

Volume is very low and is characteristic of completed moves. The tendency of volume is to expand as moves gain momentum and become obvious, and to contract when they have exhausted themselves. Peak volume since the bear market set in, as measured by a five weeks average, was 1,392,000 shares daily, reached in the panic decline of May 1940. This peak was closely approached last December as a result of the combination of selling generated by the Jap attack on Pearl Harbor and year end tax selling.

The lowest average volume in a generation was 272,666 shares daily. For 20 weeks daily volume has not averaged 400,000 shares. Half of this time the average has been under 300,000 shares. Volume is and has been at a low extreme for months. Neither the decline of this year nor unfavorable news has developed sizeable nor increasingly sustained volume. The inference is that liquidation has run its course and that the final phase of the major decline has been completed.

Conditional upon the industrial and rail averages holding above their recent lows of 92.92 and 23.31, there is ample justification to presume that a bear market has been completed and that a bull market has set in. The breaking of these lows by both averages will invalidate this presumption; the plotting of the three movements previously described will confirm it. Written as of July 3, 1942. Industrial average, 104.49; rail average, 25.02.

Justin Barbour