The Dow Theory: Hamilton's Track Record Re-Considered

[nodoodahs]

I saw this and I thought of you, Henry.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=58690

The Dow Theory: William Peter Hamilton's Track Record Re-Considered

STEPHEN J. BROWN
NYU Stern School of Business
WILLIAM N. GOETZMANN
Harvard Business School; Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)
ALOK KUMAR
University of Notre Dame - Department of Finance
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January 23, 1998

Abstract:
Alfred Cowles' (1934) test of the Dow Theory apparently provided strong evidence against the ability of Wall Street's most famous chartist to forecast the stock market. In this paper, we review Cowles' evidence and find that it supports the contrary conclusion -- that the Dow Theory, as applied by its major practitioner, William Peter Hamilton over the period 1902 to 1929, yielded positive risk-adjusted returns. A re-analysis of the Hamilton editorials suggests that his timing strategies yield high Sharpe ratios and positive alphas. Neural net modeling to replicate Hamilton's market calls provides interesting insight into the nature and content of the Dow Theory. This allows us to examine the properties of the Dow Theory itself out-of-sample.
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He was wearing my Harvard tie. Can you believe it? My Harvard tie. Like oh, sure, HE went to Harvard.

[HenryTo]

Thanks Bill, for posting this. I believe every student and potential student should read this paper and study Hamilton's record (a copy of all his editorals is available on Robert Rhea's "The Dow Theory"). Had he lived until just a few more years, his record would be super-impressive - given that he called the end of the secular bull market just a few days before the crash on October 25, 1929 (and before the subsequent 75% decline of the Dow Industrials until July 1932):

http://www.marketthoughts.com/dow_theory.html