RCA

Saut: When Stocks Ignore Bad News, That's Good News

On Dec 09 11:03 AM Jacktrader wrote:

> Last Friday’s equity market trading reminded us of this old Wall
> Street saying,
>
> “The market bottom is defined when it stops going down on bad news.”

Hmmm... the old Wall Street saying I remember is,

"The market bottom is defined when it fails to rally on good news."

The logic is that when even good news can't raise buying interest, we have exhaustion which confirms the capitulation. There is a wide-spread misconception about the meaning of capitulation. Many people and pundits think it is when we have a large downdraft in stocks, and indexes find new lows.

That is a necessary occurrence, but not a sufficient one for a complete capitulation.

Capitulation occurs during and *after* the downdraft, when the majority of market participants just throw up their hands in dismay, throw in the towel, and say, "I'm done!" After capitulation, the market languishes and even good news can't make it smile.

> "Bear declines end in only one way -- in exhaustion."

Exactly. The market is exhausted of energy and the market participants are exhausted trying to fight the downward trend.

The current generation of investors has been conditioned, thanks in large part to the Internet (and also to a pervasive herd-mentality of short-term thinking), to believe that things always happen in Internet time, and events have the longevity of a sound-bite. "OK, the market has bottomed, we can check that off the list. Now we will rally."

The "real world," however, (as opposed to the virtual world that has become the new shibboleth) does not operate like that. We are currently in a bear-market rally, and we have not yet seen the capitulation. Those who feel strongly that we have, will soon be parted from their money.

The economy is getting palpably worse every day, every hour! Do you really think that the companies you are investing in are going to prosper near term? Massive layoffs have been announced and more will come soon. Retail is in the doldrums. Manufacturing has all but ground to a halt. International trade simply is not happening. Foreclosures are causing even safe and sane mortgage borrowers to be upside down in the homes.

All of the recessions and downturns in recent memory have been "bailed out" by consumer spending. Today's circumstances are far worse than any of the others until you go back to the Great Depression. And the outcome will be much worse, and last much longer because (I hate to break it to you, but...) the consumer will not be carrying the economy on their backs this time.

Too many consumers have lost and will lose their jobs. Too many consumers are already mired in debt and consumer credit is drying up. Too many consumers have witnessed a major loss in their retirement portfolio. Too many consumers have seen their home equity evaporate.

A report on NPR this morning detailed the problems that a large wholesale clothing distributor in NY is having. They have a warehouse crammed full of top line suits, shirts, slacks, and other apparel that they can't move. They normally supply major retailers with this merchandise, but within the last three weeks, five of their seven largest customers have cancelled orders and say they will not be buying anything for at least a month, maybe longer.

Do you really think that we can spend our way to prosperity this time? What fairy tale events are you perceiving that are going to magically produce profits for companies that are retrenching and not conducting business?

Although my words may seem harsh, I offer this rebuke respectfully and this admonishment gently because my beliefs are not doctrine. I admit the possibility that I could be wrong. But I fear that I am right.