Theory on why there is no capitulation

Discussion in 'Trading' started by detective, Mar 19, 2008.

  1. The financial markets are fascinating because they are constantly changing. The reason you have capitulation is because of human emotion and fear, the fear that the market will keep going lower and crash, wiping out your investment dollars that took several years to gain.

    In years like 1998, 2001, and 2002, quant funds and funds using a few quant strategies were not a big part of Wall Street, their equity in relation to other strategies were miniscule. In 2008, that has all changed. Quants have a huge amount of money under management. Firms like Renaissance have become the 800 lb gorilla moving markets. Bots rule the futures markets. Just from the action and bid/ask changes on Friday and Monday, the action was ruled by bots. Without quant funds, we would have had a bloody day like some of those days that we saw in 2001 and 2002.

    When the markets gapped down hard at the open on January 22, 23, and also on Monday, March 17, there was a flurry of buying in the first hour. The markets went straight up off the weak open. In normal times, fear leads to the market going even lower on such days at the open, but with bots and quant funds driving the short-term action, on big down days, they are doing the buying, providing a constant bid on weakness. This prevents any kind of capitulation from happening, dampening down moves.

    Only when these quant funds go out of business (unlikely), will this buying dissipate on weakness. Until then, expect big down days to be met with buying during the day and instead of the market crashing, expect a market rebound intraday and calls that this is a bottom from the media. But stocks eventually find their level, no matter what the quant funds do to bid the market on weak days, they cannot preven the market from going where it wants to go. They can only delay it.
  2. Interesting Theory. Makes a lot of sense.
  3. GTS


    Your premise seems to assume that bots employ mainly counter-trend strategies, that is they are buying when the market is falling.

    On what basis do you make that claim?
  4. Good post, detective.

    My guess is that a large part of the bot trading is counter-trend as that is what "tests out" the best - most gain quickest on paper. Of course, any interaction with the system may change the system, so the edge may not work out so well in future. If too many pile on buying a dip, it will dissipate before they can get good fills, same for shorting rallies.

    The bots may have a "switch" to go from counter-trend to trend - whatever average trend length it takes to trigger that would surely become the average max length of a trend, eventually.

  5. Quant funds use relationships between various indices, historical results, and quantitative formulas on valuation as well as other esoteric variables which are proprietary. In effect, they are buying on sharp quick weakness in equity markets as that's what's tested out the best in the past. Note: this is different than buying weakness, they probably wait for factors like a jump in the VIX or put-call ratio as signals so they are only buying extreme weakness, which has worked well in this environment.
  6. its really programmed buying at specific support levels. thats all it is. you need an intraday breach of those levels to get any real fear,not breaches at the open.