Is capitulation at hand ?

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

  1. xll


    I am puzzled by the idea that lowering US interest rates is bad for the Euro. That is the case if rate cuts revive the US economy, keeping the US as the favored destination for capital. But if the economy is not revived, then declining asset values coupled with lower rates of return could result in money leaving US dollar-denominated assets. In that case, the US dollar would decline and the huge US trade deficit could make the drop in the dollar very steep, compounding the problem.
    I'm just suggesting that there are many ways that the future can play out. Rather than deflation, stagflation is a possibility, with emphasis on stagnation, and with inflation coming in through a lower dollar.
    #11     Mar 11, 2001
  2. white17,

    You bring up a good point, namely the contrarian aspect of all of this. When the media and people in general talk about how terrible things are, that's usually when things turn around, just as when everyone was saying how great things were, it was the death knell for the market. The question is, are there enough people in general finally catching up and saying how bad it is? Even now, analysts are saying now is the time to buy rather than "everything sucks, and stay away", indicating that we may not have reached the bottom. I also agree with atrader that even when we do hit a bottom, we won't necessarily bounce right back up. There could be quite a bit of basing or rangebound trading for some time before any meaningful upward movement. Let's not forget the markets remained essentially rangebound for a 15 year period from the 70's through the end of the 80's. Any expectiations for a V bottom could be premature. In any case, trying to pick a bottom is futile, and the best play is to follow the trend once it's begun. Right now the trend continues down, and as such is best to follow it with stops in place.
    #12     Mar 11, 2001
  3. I want to believe that we are close to a bottom as well. But honestly, while the people on this board are quite pessimistic (myself especially) I don't think the investing public are. I want to use this example. I just got back from a bas mitzvah. My relatives know that I'm pretty up to date on the market. THey are all hurting, and all lugging around a lot of tech. All they wanted to know was when does tech recover. They want to know when they should double up. If we were really at a bottom, they would be talking about selling their tech to buy bonds, or something else. I was asked by at least 15 people about LU,CSCO and SUNW. It seemed that everyone had the same half dozen stocks in their portfolio. No one out there could believe that I would have negative things to say about the outlook of any of these, especially LU (which is the most obviously troubled, especially b/c it doesn't even have an official ceo) All they wanted to do was double up. True bottoms dont happen til they tripple up down the road, and then do it one more time before the pain becomes unbearable. When I suggested selling some and buying 2-year notes, or buying some energy related stocks I was laughed at. This is the true investing public, they are the people who send in money to the Janus 20 every month. They are the ones who control things, so all that says is that we are ahead of the game at this board.
    #13     Mar 11, 2001
  4. I'll go out on a limb and predict we are very close to the low for NASDAQ. Monday was brutal. The selling has continued unmercifully and NASDAQ is now blatantly oversold. With the FED meeting next week and the expectation of lower interest rates, I do not think investors will be able to resist buying stocks at these price levels. What may begin as a trickle of buying may turn into an avalanche of money entering the market. The billions of dollars currently sitting on the sidelines may be put to use in the very near future.

    A reason for optimism:

    "According to Mr. Sandifer, following each of the oversold periods in the past, the Nasdaq has increased in the range of 35 to 260 percent, and such rallies have lasted from six months to a period of several years. In that regard, let's hope that history does in fact repeat itself."

    #14     Mar 13, 2001
  5. white17


    Right ! Let's hope history repeats. But consider that everyone expects AG to lower rates and we are still selling off. I think it's going to take some sort of surprise, like 75-100 bp cut to wake up the buyers. I hope I'm wrong.

    Luck to all
    #15     Mar 13, 2001
  6. I guess the fact that many of us are still looking for a market bottom suggests that we haven't reached the point of capitulation....

    Waiting for Investors to Cry Uncle? Here Are the Signs of Capitulation
    By David A. Gaffen
    Staff Reporter
    3/14/01 8:23 PM ET

    Another brutal day, this time without a real bright-line reason. Japan in trouble (is that news?), Europe starting to wonder about its own growth prospects and an extremely fragile mood on Wall Street combined for a dour, down day.

    For several weeks, the chin-scratchers have looked for a "bottom." That elusive search has evolved into a Ahab-like hunt for "capitulation," for once that's located, the market can turn higher. Or so the sages say.

    But capitulation, like a bottom, isn't presenting itself. Instead, the market is steadily bleeding lower. And despite all of the pessimism in the air, the sense is that many investors are still holding on, hoping for the market to turn.

    Webster's Dictionary defines capitulation as " the act of surrendering or yielding." Phil Ruffat, senior vice president at Fuji Futures, says: "We have a different definition in Chicago: Throw in the towel."

    Whatever it is, most market strategists haven't seen it. More troubling, some strategists think the search for capitulation is a fool's errand. Too deep into the bear's maw, they believe the market will take time to summon up the energy to move higher again. Instead of a single, violent downturn, the bull will have to piece itself back together in painfully slow steps.

    For the crowd hunting the wicked downstroke to mark the end of the pain, what do they seek? Here's a short list, ranging from the most specific to the most anecdotal.

    Heavy Volume Without fail, strategists said they'd be looking for a day of incredible volume, somewhere in the order of 3 billion shares traded on the Nasdaq Stock Market and 2 billion on the New York Stock Exchange. This is what happened on Sept. 1, 1998, when the market reversed dramatically after a massive selloff on Aug. 31, 1998, which came in response to growing fear about Long Term Capital Management and the Russian debt crisis.

    On Sept. 1, the Dow ended up 330 points on what was a then-record 1.2 billion shares traded on the Big Board. That year, average daily volume was 673 million shares, so "capitulation" doubled the daily average. This year, according to the NYSE, average share volume is about 1.2 billion shares a day -- so one would be looking for volume in the order of 2 billion shares or more.

    Duck-and-Cover Type Protection When portfolio managers don't want to own stocks anymore, that's a signal, and it can be witnessed in high cash levels in mutual funds, on the order of 8% to 9%, rather than the current 5% to 6%. Defensive moves in the futures markets are also an indicator. As's Brian Louis wrote earlier, indications that people are taking major steps to protect themselves, such as massive buying in puts (options that bet on more pessimism) or an increase in the different options volatility indices, would indicate the type of panicked reactions that signify sellers are getting washed out. This happened in October 1987, when the Chicago Board Options Exchange Volatility Index, or the fear gauge, hit an all-time record.

    Fear and Loathing This is more subjective, but talk of heavy margin calls (which isn't easily determined) or reports of redemptions from mutual funds for more than a period of a day or two are considered sentiment indicators that show growing fear. When people in the market, professionals and amateurs alike, are making drastic, panicked moves, that's considered a sign, however anecdotal. It can also encompass massive selling by institutions. "When a majority of professional advisors become bearish, that's kind of when you get it," said Richard Schmidt, editor and publisher of the Stellar Stock Report.

    Reversal Days Sometimes the market opens with massive selling and then in the afternoon roars back on high volume. Oct. 7, 1998, in the midst of the Asian Crisis, was one of those days, when the Dow dropped nearly 200 points, rebounded to rise 150, and finished the day down just two points. From there, the Dow was off to the races through early last year.

    Greenspan Is Useless The market might actually be getting there with respect to this. People now expect a massive 75 basis-point cut from the Fed next week, and nobody cares.

    I Hereby Proclaim the Bottom! Even more sentimental, it ropes in all those anecdotes about splashy magazine covers heralding the end of stocks to the moment when people stop making jokes about bodies flying out of windows. Traders and analysts interviewed today believe the level of fear and panic that would signify a bottom in the market just isn't present yet, that there's still too much belief that the market will turn soon enough.

    In this instance, "it's when people stop asking about tech," says Larry Rice, chief investment strategist at Josephthal. "It's when people get fed up with it, and when people don't want to read, 'Is it time to buy tech?' or, 'Have tech stocks bottomed?' "

    If It Happens, You Won't Know, Anyway Some strategists were skeptical that a bear market would produce that all-out massive day of selling, the day when everybody collectively clears their throat and pukes out everything they don't want. A bear market capitulation is a process that can last months, some say, and investors won't know exactly when the bottom has occurred until after the fact.

    "Bear markets don't change overnight because sellers get out of the way," says Gary Kaltbaum, technical market strategist at First Union Securities. "This is going to be a slow, arduous bottoming. You're going to have to bore people out of the market. The only thing that remedies this kind of market is one word -- time."

    #16     Mar 14, 2001
  7. Just so you know, I think we go much lower. This thing is really getting nasty, but the search for a bottom has been elusive. When you washout, you question every move you make. It feels like knife catching in the worst way. We've all done it and felt the burn as it slices through you. It's when you don't want to trade any more at all to the long side cause you just keep getting burnt. People are still asking when they should add, when they say that they can't take it any more, that's when we bottom.
    #17     Mar 14, 2001
  8. white17


    Well I can't say how much lower we go but I think the Japanese bank fiasco has yet to completely weigh on the market. Consequently, when we do finally bottom I think we go sideways a while..maybe quite a while.

    That said, it looks as though a few issues may be reaching a point at which I would nibble for my long term positions but as far as trading goes I'll stick with puts for now.
    #18     Mar 15, 2001