With Pain, There Is Also Gain

The selling continues. But is this what capitulation looks like? The Volatility Index has hit historic heights, and fear is rampant. We not only lost all the critical support levels in the Dow (11,800), S&P (1200) and the Naz (2155), but it was done with huge volume and plenty of room to spare. The interesting thing was that after the gap down, there appeared to be a bit of a struggle mid session, and then in the last hour the bottom just fell out.

If you're a Bear, you have to be feeling pretty good right now, and looking forward to more selling. If you're a Bull, well the best thing I can say for you Bulls out there is, I hope you went to cash, because when we finally do reach capitulation there's going to be a lot of great bargains out there. That's what I mean when I say, "Embrace the Pain, Feel the Gain."

So why did we drop today, wasn't the Fed bailout of AIG (AIG) supposed to calm the uncertainty out there? Well, apparently it did just the opposite. It left investors wondering just what the Fed's new policy was. And to top that, we still have a long lineup of banks and financial houses that are teetering on the abyss. Companies like Washington Mutual (WM), Wachovia Bank (WB), and even Morgan Stanely (MS) look like sitting ducks. And if they go what's left? Well, there's JP Morgan (JPM) and Goldman Sachs (GS). If they are left standing they'll become the de facto powerhouses, kings of the hill.

So what constitutes capitulation? Shouldn't we expect a rally tomorrow, with these oversold conditions? Perhaps, but as this bear has shown us, we can stay oversold for a long time. What we need is big time selling across the board, followed up by a massive reversal that ends in the green. This has to be accompanied by a reversal of internals as well, with broad participation of advancers eclipsing decliners. That will mark the bottom and start the capitulation. Until this happens, you should expect some bounces and then more selling.

Right now, the indexes don't have much support underneath. The charts are ugly, with price and MACDs pointing straight down and in the negative. Until we get a leveling off, or a turn in an upward direction, there will be no confidence in any bounce, it will simply get absorbed.

click to enlarge

In the Wilderness Investor Forums we're standing pat with cash in our stash, just waiting for the opportunity to buy some bargains. Boy, don't you wish you had bought Apple (AAPL) when it went below the 120's back in February? Well, now you may just get that chance. In fact you might get the chance to buy it at a much lower price. How about $90?

Stock position: Short.

Comments

[kbear2:]

HUH? The market had an amazing up day and Apple gained as well. What are you talking about?

2008 Sep 19 04:35 AM

[Steven Hansen:]

i suspect this article was written for publication yesterday.

2008 Sep 19 05:52 AM

[Zach Bass:]

Yes. If you want to see my latest opinion of our wonderful up day and where I think this government is leading us lemmings, then check out this post on my blog, it's entitled: Born in the USA, Living Under Communism!

www.zacharybass.com/20...

This whole nationalism movement we experienced in yesterday's market makes me ill.

-zach

2008 Sep 19 06:02 AM

[rain252:]

This dweeb totally ignores the action yesterday (Thurs). Totally irresponsible. Oh gee, but did you notice he is short AAPL. I wonder if that has anything to do with this ommission.

2008 Sep 19 06:12 AM

[rain252:]

Rampant unchecked short selling ought to be outlawed. When the uptick rule was removed last July, the SEC chairman should have been fired. Short selling does nothing but add chaos to the markets and allows hedge funds and other unscrupulous types to game companies into the dirt. "Oh but short selling adds liquidity." Bull. Short selling should be outlawed. If you don't like a stock, don't buy it. If you own a stock that you now decide you don't like, sell it. If you like a stock, buy it. There....there's your liquidity and supply an demand.

2008 Sep 19 06:19 AM

[Roger Knights:]

I think there are ways to discourage excessive shorting other than banning it. For instance, require shorts, at least on certain stocks, to be held for some minimum period of time, or be penalized with a tax. This would dampen hit-and-run rumor-driven, rumor-promoting shorting.
+++++++++

As for Apple going below $100, that would only happen if the Dow went below 10,000, or the company’s outlook turned bleak, or Jobs resigned. The first seems unlikely for the next few months, in light of the RTC announcement. The second is unlikely because Apple has no debt, lots of cash in hand, a record of solid growth and good mgt., great prospects in comparison to its competitors, and no important commercial-related bad news on the horizon.

So the possibility of Jobs retiring seems the most likely reason for the recent decline. But it is unlikely IMO to drive the stock much lower, because it has already been mostly discounted, and because Apple would probably institute a massive stock buy-back program at around 110-20 (??) to absorb the stock-price "hit" from his retirement (or, more likely, semi-retirement).

2008 Sep 19 08:17 AM

[jimocarroll:]

It's up!! NO, wait, it's DOWN!!

No, it's UP!! Oh, it's DOWN!!!!

No short selling. Mortgages for people who cannot pay rent. Government indemnification of the inevitable results. Central manipulation of markets.

Well, at least they are buying iPods. But they all think Jobs has cancer. No, wait, they're buying cigarettes. Yeah, that's it -- CIGARETTES!!!

Don't like the Dow? Wait a day or so.

2008 Sep 19 09:06 AM

[Toni +:]

Clueless.

2008 Sep 19 09:08 AM

[TA:]

AAPL is nothing but a stone and the only reason it's not still sinking is because of all the short covering.

2008 Sep 19 12:48 PM

[kbear2:]

Even if this was intended for the 18th, that was an up day also. I have a feeling all Zack was interested in was publshing another negative article and just had to get this out there no matter what.

2008 Sep 20 05:55 AM

[rcraig:]

Someone please tell me they remeber how the checks and balance system works in government.

2008 Sep 22 05:04 PM