Robert Rhea was a pioneering figure in the history of Dow Theory. Rhea was a master of “reading” the stock averages along with volume implications. Rhea started his great investment service in 1932. He modestly called his service, “Dow Theory Comment.” Rhea’s Dow Theory “voyage” ended with his death in 1939.

Rhea had a private following of investors, and this group kept in contact with Rhea through a single stockbroker. Rhea writes, “On July 21 when the Industrials closed at 46.50 and the Rails at 16.76, I asked my broker to tell my friends trading in various offices that I thought the Dow Theory implied heavy buying for the first time in over three years. On July 26, 1932, the opinion below was sent to perhaps fifty correspondents.”

Russell Comment - I include below the opinion that Robert Rhea sent to his correspondents on July 26, 1932. This was sent just a few weeks after the final bottom of the worst bear market in US history. I consider it one of the greatest calls in stock market history.

Robert Rhea Calls the Turn

The declines of both Rail and Industrial averages between early March and midsummer were without precedent. The thirty-five year record of the averages shows a fairly uniform recovery after every major primary action, and such recoveries average around 50% of the ground lost on the decline; are seldom less than a third and more than two thirds. Such recovery periods tend to run to about 40 days, but are sometimes only three weeks – and occasionally three months.

The time element is in favor of a normal reaction at this time – because the slide off was normal (the normal time interval of major declines being about 100 days).

The market gave the unusual picture of hovering near the lows for more than seven weeks, and might be said to have made a “line” during the latter weeks of that period.

Because of all these things, and because the volume tended to diminish on recessions and increase on rallies during the ten days preceding July 21, almost any one trading on the Dow Theory would have bought stocks on July 19th. Those who did not, had a clean cut signal again on the 21st. Since that date the implications of the averages have been uniformly bullish, and it is reasonable to expect that a normal secondary will be completed, even though the primary trend may not have changed to “bull”. So much for the speculative viewpoint.

However, the investor asks, “Have we seen the lows for the bear market?” According to strict construction of Dow Theory, we cannot yet tell.

Surely we have many things which might lead us to believe this to be true – we have surely had a considerable period of accumulation, but these periods frequently preface secondary reactions, or occur at some intermediate point in a secondary. Should this secondary reach normal limits with respect to recovery and duration, and a decline of some weeks follow, and this decline did not break the bear market lows, after which a recovery set in which carried above the high point of the secondary now in the making, it would seem reasonable to suppose that the lows had been passed. And should the secondary now forming develop a sideways drag beneath normal expected recovery points, making a clearly defined “line”, and should such line be broken topside with some healthy advances, it

would be a splendid buying signal.

Robert Rhea
July 25, 1932

Volatile Stocks Marked the ’30s
Most investors know that the Dow Jones Industrial Average did miserably during the Depression of the 1930s. It began the decade at 248.48, down from a high of 381.17 before the crash of 1929. By July 1932, the depths of the Depression, the industrial average was crawling at 41.22. It ended 1939 at 150.24.

What many investors don’t know is that the 1930s were also the most volatile decade on record for stock prices. Investors, their nerves rubbed raw by the Depression, were prone to fits of euphoria and despair.

Thus, the industrial average plunged 52.7% in 1931 and 32.8% in 1937, but it rose 66.7% in 1933 and 38.5% in 1935. Daily volatility was also intense. Strange as it may seem, seven of the 10 biggest up days in history, on a percentage basis, occurred during the 1930s.

Franklin Delano Roosevelt took office in 1933, instituted social programs and put people to work building roads and public buildings. The history of his administration could serve as a political Rorschach test. Peering at the inky lines, some see Demon Roosevelt, others Savior Roosevelt.

The stock market generally seemed to like FDR’s measures. The Dow industrials rose 39 points in 1933, 6 points in 1934, 40 points in 1935 and 36 points in 1936.

Richard J. Stillman, professor emeritus at the University of New Orleans, said in an interview in 1996 that the launch of the Civilian Conservation Corps, the Securities and Exchange Commission and Social Security helped turn the Dow around.

However, the late Robert Sobel, a professor of business history at Hofstra University on New York’s Long Island, disagreed. The market was rebounding anyway, and the New Deal provided a psychological, not an economic, boost, he argued.

By 1938 the Dow had fallen below 100 again. Mr. Sobel blamed Mr. Roosevelt, for raising taxes. Mr. Stillman said overseas demand for U.S. goods was weak, as other countries were embroiled in their own miseries. The two historians agreed that World War II was the spark that finally ended the agony. Said Mr. Sobel: ”The war took the country out of the Depression, not Roosevelt.”