Seven Thoughts on Capitulation

Everywhere you look, people are debating whether last Monday's S&P 500 plunge of 8.8% combined with this past Monday's 8.3% loss at the lows and 3.8% loss at the close is the capitulation we need to call a bottom. Was the last-hour recovery Monday a sign that the tide has turned?

Here's a round-up:

• Mark Hulbert: "It's worth remembering a truism about market psychology that has been too often overlooked in recent weeks: When genuine capitulation finally takes place, few will recognize it as such at the time. In contrast, an eagerness to declare that capitulation has occurred probably means that it hasn't."
• Bill Cara: "Equity markets complete their Bull and Bear cycles with increased volatility, which is the case today. Bull cycles end when the actors run out of cash needed to push prices higher. Bear cycles end because cash holdings build up to very high levels amid the growing opportunities to buy value."
  
  "Presently the latter situation envelops the market. There are at least $4 trillion in cash now on the sidelines plus a couple trillion more in newly printed fiat money from the treasuries of governments around the world. There is sufficient cash to feed the Bull."
• Michael Kahn: "There can be no denying that the current market conditions are indeed extremely volatile. And volatility is something we usually associate with turning points in the market and not the continuation of the current trends. That could be good news for investors, even if some sentiment readings are not quite ripe."
  
  "However, being even one day off in timing during such times can spell disaster to a portfolio whether you are a professional trader or casual investor. For that reason, sitting on the sidelines is the best advice I can give. After the market finally finds its bottom, missing the first few weeks of the new rally won't really matter in the long run."
• Jim Cramer: "Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now."
• Barry Ritholtz: [On Cramer's warning Monday] "As I have said in the past, I don't like to harp on any one person. I also don't want to be a Cramer stalker. But DAMN if that headline doesn't smell like a giant buy signal."
  
  "The market down 30%, the VIX spiking to 56, and Cramer giving a panicky SELL on TV this morning. We have a 9,500 downside target, and the likelihood of an emergency action makes us want to get long -- at least for a trade..."
  
  "We are putting a toe in the water here."
• Bespoke Investment Group: "Market commentators this afternoon seemed downright masochistic, as many of them complained that we needed to be down even more after falling close to 800 points today. Then, as the market rallied back in the last hour of the day, those interviewed on CNBC were complaining that it didn't mean capitulation was taking place. But who ever said that capitulation couldn't happen in the middle of the day? And since when was an 800 point drop and a VIX spike close to 60 not considered panic selling?"
• Charles Kirk: "For what it is worth, I think the afternoon reversal was generated by short-covering (i.e. profit-taking by the bears) than any real buying interest."
  
  "As you might imagine, the sentiment and technical indicators are literally off the charts suggesting we're going to see a big-time counter-trend reversal sooner rather than later. As in life and the market, there are no guarantees but when you see readings of this nature, that is pretty much as close as you are going to get unless the world and the market are about to come to their bitter end."
  
  "Beyond the obvious, the best thing to say about the market is that at least no one expects anything good to come from earnings season this time around. And, as far as hope for the Fed and Plunge Protection Team, well, you can forget about that as well. The action over the past few days shows us many fear the world is headed for a complete collapse and anything short of that will be a positive surprise. All in all, at a minimum, it's time to start thinking about what can go right for a change because no one else is."
  
  "There are no equity indicators at extremes that are offering bearish readings right now. Not a single one."

Comments

[SHARON T.:]

Let them wait for their "real capitulation"....I'm buying with 2/3 of my fund.

These idiots will miss the "real capitulation".

3 months later, they'll say WTF, it's only money.

6 months later, they'll say...the water is good and they'll buy in then the market will retest the low.

Remember, the market has never reward the "safe" player.

You should know by now 1) there's no safe stock and 2) no time is safe time to buy any stock.

2008 Oct 07 10:17 AM

[Chris Lau:]

The problem with the observations/comments is that we won't know a bottom is in place until after the fact. Traders who risk money now will be rewarded if correct. Traders who missed the bottom but see a market recovery will pay a premium for it but it will be well worth it. Think of a falling market. Who has the best risk/reward? It's the latter group.

2008 Oct 07 03:07 PM

[viva:]

It's hard to resist picking up shares of good franchises trading at 40% of book value. Waiting to pick them up at 30% might be seen as being greedy.

2008 Oct 08 08:29 AM

[bbowen7:]

If a majority of the trading is handled by computer programs that know nothing about Alcoa's earnings, the layoffs at eBay, or the presidential polls it seems logical that the mathematicians would be feeding off themselves, and decoupling from the underlying economy. Glad to not be a trader.

2008 Oct 08 05:34 PM

[granger:]

It's simple (just hard to wait for).

The market is done going down, when it stops going down. Reread several times. Simple and powerful, when combined with patience. Wait for it. There will be a bottom, then a higher bottom. Until then the down trend is in place.

2008 Oct 11 03:48 AM