[Although there has been a lot of press on this lately, bear markets
do not have to end in capitulation. They tend to occur after short,
sharp corrective phases. Over the last several decades, many of the
longer grinding bear markets ended on relatively low volume.
It just takes time.
Waiting for Investors to Cry Uncle? Here Are the Signs of Capitulation
By David A. Gaffen
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
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 TheStreet.com'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
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
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."
This archive was generated by hypermail 2b29 : Fri Apr 27 2001 - 23:14:14 PDT