Is capitulation at hand ?

Discussion in 'Trading' started by wirelessbull, Mar 9, 2001.

  1. Any opinions on whether this is the bottom for NASDAQ ? I certainly didn't anticipate the blood bath we experienced today - at least not to this degree. From a contrarian point of view, perhaps this is a good thing - and a market recovery will begin just as many folks have given up hope.

    If most folks sit on the sidelines until things stabalize... how will the market react ? Will low volumes exacerbate stock market declines ? At what point will institutional investors enter the market strong ?

  2. That's the million (or multi-million) dollar question. As long as the majority of investors and traders sit on the sidelines in a "buyers' strike" so to speak, stocks will continue to slide gradually down until buyers are willing to step up.

    Also remember that while the NASDAQ has taken a huge haircut, the DOW and S&P have remained relatively intact. There is the possibility that they too will crack, in which case, the NASDAQ is not done going down, and the teens are a distinct possibility.

    Clearly, however, we are much closer to a bottom in the NAZ than a top (duh!), and the downside risk to owning stocks here is getting smaller and smaller. How much risk is one taking on by buying SUNW at 18 after not so long ago trading above 100?? How about CSCO at 20? Even my fave trading stock, JNPR, at 50? As I previously mentioned in another thread, if the FED gives us a 50 point cut on the 20th, I will be buying good stocks like these aggressively with the downside risk so limited, and I can always sell covered calls against them if what limited further downside risk does hit.

    Also, it can be risky to stay short here with so much sidelined cash itching to buy stock. I do think that provided a couple of factors come to pass we are very close to the bottom. The first factor is the FED, and the second is the Dow and S&P. If the FED doesn't do 50 basis points on the 20th, and/or the Dow or S&P begin to fall apart like the NAZ has, all bets are off.
  3. Zboy - good point about DOW and S&P. There hasn't been the extreme volatility in those indexes when compared to NASDAQ and I hope it continues. Lately, investors have been putting their money in stocks with steady earnings in a recessionary environment such as Philip Morris (MO). If the DOW and S&P started to decline precipitously - I agree - all bets are off.^ixic&d=2y&c=&x=on&y=on&z=on

    FED interest rates cuts are a foregone conclusion at this point. There's just the question of whether it's 1/2 point or 3/4 point rate reduction.

    Good article on capitulation below. I think we're pretty near. There are too many great companies out there that investors are itching to buy as soon as the carnage is over.

    "At the bottom of a market or in an individual stock, investors capitulate. Some will sell shares at any price just to get out. Others won't buy no matter how cheap the stock gets. That moment -- the moment of maximum despair -- is a bottom."

  4. limbo


    Wire-the fed could go with 1/4pt
  5. xll


    Another point of view on interest rate cuts from the March 9, 2001 Economist magazine:
    "... if the American economy does now slide into recession, interest rates may be less effective than usual in reviving demand. Consumers may be too intent on saving more, and businesses on reducing their debts and excess capacity, to pay much attention to a reduction of half a point here or there in the Fed Funds rate. This, in turn, raises the possibility that the recession, if it starts, could be deeper or longer than its recent predecessors."

  6. That is the threat that is most onerous, and one that remains to be seen whether we can avert this time around. Historically, in the U.S. rate cuts work in reviving the economy and the stock markets. However, we are collectively sitting on more debt than at any point in history, and if that house of cards collapses, we will enter a deflationary black hole that will make the Great Depression look like a dress rehearsal, and that rate cuts will cease to help with. Japan is a good example--they've lowered interest rates to 0, but no one is buying, and the Nikkei is at 15 year lows, having gone from 40,000 to 15,000.

    With companies like AT&T sitting on $67 billion in debt, how do you possibly service that? How much money would they have to make to handle their payrolls, expenses, AND pay down that debt? More than is realistic. And if they go under, think about the banks that are holding those notes that will be crushed. Citigroup, Bank of America, etc. It's already happening with utilities defaulting and other telcos in trouble. It then spirals to new businesses, which will be unable to obtain financing to roll out their technology or start up, further hampering new innovation and stimulus to the economy.

    My personal opinion is that we will very narrowly miss falling into this hole THIS time around. We are a nation of spenders, we've never had a real attack or invasion on our own soil and have a sense of security that will keep us spending, and avoid a collapse. However, I believe that with debt being what it is here, rate cuts will stop working the next time around, and if Greenspan pushes us into another contraction or recession after this one, we're headed for that black hole.
  7. I honestly think we're screwed. Long term, I think we're gonna fall into that black hole. We have massive deflation, and I don't think we're gonna recover easily. I think in the end, a few of these large banks/ brokerages are gonna fail b/c of the debt that they hold. As for trading....
    I only think we get 25 bp this time. The economy is still quite robust. Just tech is ill. AG doesn't care about tech. He cares about our economy, and the world econ. If he lower rates too much, it will destroy the Euro, which is just beginning to recover. I don't think that enough people are paying attention to that.
    As for trading... I dont' think we get a bounce til like 1950 possibly, but more likely 1800. My ratio said on thurs that we would reverse and drop like a rock. B/c of option expiry, I think we rally on thurs and fri. (Goldman would never let those puts go out in the money) As for a BOTTOM. I have a checklist of things that I want to see, but i think this bottom could rally us 25%, but then we start drifting lower again.
    1. we loose nas 2k and dow 10k... (we need to use these meaningless numbers to shake out mom and pop)
    2. IBM or GE (or both) has a major earnings warning, the type that really nukes the market. (or maybe cien, but it's not a dow stock)
    3.The fed does a rate cut, we rally a bit, and then continue downward(this would be really scary, because it would show that the fed was powerless)
    4.A major brokerage, bank or mutual fund group has margin/liquidity problems.
    5.There is a major run on our markets by foreigners. (THey still hold 15-20% of our market cap)
    6.The "safe" momentum plays (MO, TUP, etc.)really take it on the chin one day. All the guys who were chasing cmgi to the moon, are now in MO, I think that any bad news (court ruling on smoking, bad earnings, etc.) could really take this house of cards apart. It is really a ticking time bomb, the momentum players have to finally be destroyed once and for all. The list narrows every day, but there are still about 4 dozen of these types of stocks, and they have to get hit.
    7.A major analyst to go negative (Abby joseph cohen) she just upped her equity weightings, she needs to lower them again.
    8.Some major mergers in the CLEC world. If a few of these get together, sell off overlapping assets, they can crunch some of that debt and get solvent again. Once solvent, they can buy equip. from csco, glw and others again.
    9.Suicides: Right now, the sinking market is front pages, but only sometimes. I want to see stories of real devastation. The quote of the week from one of my friends was "I'm not covering til I see bodies drop past my window" (he works on wall street). I think he has a point.

    In the end, a lack of consumer spending will destroy this economy. We all know people who lost the last 30 years of retirement money playing the tech market. They were millionaiers for 6 months, but now they don't have anything. Those people are going to put every cent into the bank, and not come back to the market for a long time, and definately not go out and buy cars, houses and vacations.
  8. I agree that long term the US, and therefore the world economy is bleak. We've continued to overspend and not worry about "tomorrow" for way too long. However, I disagree that only tech is suffering now. Old line companies like Whirlpool and others have announced layoffs and earnings warnings as well as tech. I do agree that Greenspan is in a pickle, deciding between cutting rates to a point that will hurt the Euro and trying to firm up our economy. I also concur that if a player like GE or IBM warns, it could be the catalyst that collapses the Dow and S&P like the NASDAQ already has.

    Interestingly enough, a colleague of mine has run a service for many years that is based on a proprietary model that has correctly identified the ups and downs of the market. He accurately identified the crash in the NASDAQ (although he received the 'sell' signal in November of 99 and the NAZ crashed in March 00, missing some of that huge runup, but nonetheless saving his clients untold sums that might have been subsequently lost). His model has remained in a sell signal ever since, and now is predicting a very high likelihood of reaching critical mass (similar to the levels before the 87 crash). We're not there yet, but he believes that if it reaches critical mass, the Dow and S&P will begin a calamitous decline that can be profited from greatly using index options.
  9. aTrader


    I think Praetorian2 has a point in number 9 of his checklist. I remember the media just before the crash. Every newspaper wrote about what stock to buy and how easy it was making money. I think we have to wait until we see the opposite in the papers again. Stories about how terrible life is for stockowners and so on...

    I also think we have a bit left to the bottom. Dont forget that we can go sideways as well for a very long time.

    In the meantime and as a trendfollower I can only say, trade where the trends are. The following industry groups (TC2000) has been in a nice uptrend the last 2-3 months:

    Tobbacco (What's up with MO!)

    Maybe not as sexy as tech stocks, but still, ahhhh, trendy! =;-)

    Good trading

  10. white17


    WOW; This thread makes me consider stocks in funeral homes and mental health clinics. I don't necessarily disagree however. As I said on another post, I think we continue to drift downward for a while longer. As far as AG and the EURO, I believe that AG will not hesitate to cut rates. If the US and EU have no markets for their goods and services it won't matter what level the EURO or the dollar is at. Cosequently, I believe AG focuses on the health of the US economy at this point. A couple of weeks ago I read an article comparing the historical levels of world rates to that of the US. It indicated that only twice in this century have US rates been 100 bp higher than average world rates. This is the third time. Each time previously has resulted in the same type of pain we are experiencing currently. Also, in each previous period the Fed has moved aggressively to bring US rates into line with the rest of the world. I wish I could find that article again as it was quite interesting.FWIW
    One last thought. Can we consider the negative sentiment on this board as typical? Could it be viewed as a contrary indicator?
    For me, I'll stay long the Puts and away from the windows.

    #10     Mar 11, 2001