Classic Capitulation

"are in place" = "are not in place"

Oops!

I think I'll stay with my puts, Steve. :)

Capitulation will come on one nasty day with enormous volume. Yesterday was not it.

Today is.

You seem to forget that though capitulation normally occurs with large volume, we've seen nearly a 20% decline in 12 days. You're not looking at a 1987 event - you're looking at a 2008 event.

Dow 9600 is the resistance level. They couldn't sustain that yesterday, we're getting very close to that today. If it breaches it we may go much lower; it if doesn't, it's probably a medium-term bottom.

I'm not alone in this thinking.

I don't know why, but I kinda feel that way, too.

We crossed 10k, a major support level, but didn't really get crazily lower than that (as was predicted). Anybody who can't take the fear of risk is already out.

There isn't much more left to tell us the world is ending. And thats what all bottoms feel like.

If it *didn't* feel like it could get worse, it would be better already. If Dow 8000 wasn't a "possibility" then we'd be back at 11/12 aready.

This is definitely capitulation time. 100% not sure. But we're getting there.

looking at the chart now, we seem to have bounced off a point higher than yesterday's bottom... maybe yesterday was it.

Let's wait and see what these earnings reports look like and how the market reacts to them. EPS reporting season kicks off tomorrow with Alcoa and it should be very interesting for the next few weeks.

I do have a shopping list so it's not like I'm a total bears. As they say, the lower it goes, the lower the risk. I do use protective puts (double short ETFs) to hedge the few long positions I have at this time.

I would love to see a 3-4 billion share wash out day before I put my buying shoes on.b

"I would love to see a 3-4 billion share wash out day"

I don't think you're going to get one this time. Remember what Bernake said about this downturn - it is the first time that the Fed has acted before a large number of financial services firms went under. The big down days in terms of volume occurred at times when there were no trip switches, no bans on program trading, and no access by individual consumers to the information we have today. So there isn't that pent-up sell energy that has always existed in the past.

Not that there won't be any further downside, but this quarter's earnings are already priced into the market, and if they weren't BAC's pre-announcement yesterday certainly shed light on it.

If we break below 9600 and stay there I'd be very worried. I think we won't, though I'm not sure.

Steve, it's been my experience that bottoms take time to form and different sectors will turn up as the market goes through that process. If there is a strong rally from a certain point, more than likely the market will retest it a few weeks later.

I've been scanning for ideas and they must be trading above their respective 200 day moving average before I get involved. Those companies should represent the new leadership groups as the market begins to recover.

I've never been too successful at calling the exact bottom but it is also not necessary to have success.

"There isn't much more left to tell us the world is ending. "

How about no central bail out mechanism for failed european banks. You see what happened to fortis? How about no short rule lifted wednesday and you've got more capital raises needed on financials that no one wants to put anymore money in? Do you think banks no longer need additional capital? Unemployment continues to increase and the FED/SEC/Treasury/Congress have pulled out about every trick in the book. The main bullet they have left is about another 1% or so on Fed Funds. And while the market has come down huge, estimates on corporate earnings are still way too high and need to come down. And on top of all that, there could still be significant amount of unwinding of levered hedge fund money (they have ~2 trillion unlevered) as they deal w/ not just redemptions but margin calls.

Having said all of that, it definitely feels like people are throwing in the towel. I think i'd start nibbling at things here. But would not do more than that. I'd rather miss the bottom tick and not be a hero to avoid being a zero.

"it's been my experience that bottoms take time to form and different sectors will turn up as the market goes through that process."

Agreed.

"I've never been too successful at calling the exact bottom"

No one is.

"but it is also not necessary to have success."

Agreed.

Special_K: the stock market is a leading indicator, unemployment and inflation are lagging indicators.

Do we really have a sense of the weakness in financials at this point? Can we understand the interplay between them and the rest of the economy? Consider this feedback loop (http://www.bloomberg.com/apps/news?pid=20601087&sid=aFLqcpe0qGRc&refer=home) where the mortgage problem led to the banking problem which is worsening the mortgage problem.

This is a very non-linear system. Non-linear systems are often chaotic, and very sensitive to small changes.

"Non-linear systems are often chaotic, and very sensitive to small changes."

Except the government is guaranteeing that banks will make money.

> "There isn't much more left to tell us the world is ending. "
> How about no central bail out

My point wasn't that more can't go wrong.... my point was just that every warning bell has now been rung. Everyone is already talking about doomsday and worst case scenarios.

So, I'm just talking about the capitulation issue... we interestingly have 10x the bad news as a few weeks ago, and we're just down like 5% off that bottom.

"more can't go wrong."

Yes it can.

But this is becoming a self-fulling prophecy: so much talk about economic gloom-and-doom is leading to...economic gloom-and-doom.

I'll say this, it doesn't give me much comfort (market bottom wise) to see Morgan & Bank America getting killed today plus Citi is back to the $16 area.

Also, with the exception of gold, the deflation trade appears to be alive and well which is not a positive, at least from my perspective.

"Morgan & Bank America getting killed today plus Citi is back to the $16 area"

People with long positions are getting out before the short ban ends tomorrow. Plus Morgan is suffering rumors, BAC posted some pretty dismal numbers, and Citi is involved in a fight over Wachovia.

Let us recall that this is a market that has just gotten EVERYTHING that it asked for - listed above - yet people continue to sell.

So what more does the market want? It can't get any more since there's nothing to give it. Everything is in place, including an interest-rate cut.

Yesterday all the experts said that yesterday was not a short-term bottom because of the last-minute rally, and that they would be looking for a further decline today, and testing 9,600. They got their wish.

> "more can't go wrong."
> Yes it can.

Steve, read more carefully.

The word right before your (mis) quote was WASN'T. As is WAS NOT.

>People with long positions are getting out before the short ban ends tomorrow.<

I'm fully aware of that Steve which is the reason I recently dumped my JPM position. However, the reasons are not so important as is the price action. That sort of action indicates to me that this market has zero confidence. In a healthy market, it would not matter.

The short-selling ban may also be reinstated & if I know this, I suspect others do as well.

"That sort of action indicates to me that this market has zero confidence."

That's my point about capitulation. There was a thread yesterday saying that 60% of Americans think we're going to enter a depression. Cramer says to sell everything. (He's always inspiring.) Every technician says this is the bottom or close to it. The Fed has now done everything it officially can do, including announcing an upcoming rate cut. All of this, and still no confidence.

This market has three shoes to drop 1)credit market 2)stock market 3)housing market when we get capitulation on all three it'll be time to look upwards. For now we're still looking down.

The US indices fell more today than Brazil.

Shoes:

1) Credit market - everything is now in place, nothing more can be done until the programs kick in, some of which are immediate.

2) Stock market - testing 4-year lows.

3) Housing market - prices are starting to rise in California, the hardest hit location.

"But this is becoming a self-fulling prophecy: so much talk about economic gloom-and-doom is leading to...economic gloom-and-doom."

The inverse of bubble. The system is irrational in both directions. Very unstable. But I think not really knowing the size of the credit bomb is a big part of the problem.

"everything is now in place, nothing more can be done until the programs kick in, some of which are immediate"

But is it enough? Not enough so far to give confidence, which might undermine the gains the efforts might give.

I hope things settle down very soon. My worry is that panic will fill the void of irrational exuberance and lead to an avoidable crash.

steve, can I just say that I appreciate your very guarded optimism. Somebody has to have some.

"My worry is that panic will fill the void of irrational exuberance and lead to an avoidable crash."

Another sign of capitulation.

"I appreciate your very guarded optimism"

Another sign of capitulation.

We are somewhat below yesterday's lows, which is somewhat worrisome. I think you'll see more rate cuts overnight and over the next few days. But everything is in place to fix the problem - it's just a matter of getting it moving.

Don't get me wrong - these are very troubling times & I've lost a lot of money. None of it had to happen, of course, but that's by the wayside.

"Not enough so far to give confidence."

I'm not so sure. I think in the retail segment you might be right, but value investors are now going to start moving because everything is so oversold. Read Bloomberg, WSJ, MarketWatch, CNBC, and what the investment advice is: they're even recommending moving into emerging markets to prepare for the upturn in a few months' time.

> "That sort of action indicates to me that this market has zero confidence."

When you have zero confidence, generally the only place to go is up...

Everybody relax...jees Steve...dont worry your emerging market investments will come back...the market could go down another 10% or so...

I see Steve's concern as a very bullish sign

flmd, I'm not concerned, and it has nothing to do with my emerging market investments which I'm also not worried about. I have a very long-term horizon, and honestly, they've fallen just slightly more than the Dow.

Read my posts - I'm the one who's saying we're bottoming out.

Steve-
It's your show and you are the anti-Cramer but I think we still have a little ways to go...

That said, I'm feeling capitulation inside of me right now - "Enough is enough!" There have been a couple times I've felt it & I've resisted. Which indicates a bottom is near.

Just when you think, "They've done everything they can and nothing is working," is usually the moment when things start working.

"It's your show and you are the anti-Cramer but I think we still have a little ways to go..."

Perhaps. But I haven't heard any professional trader say that the market will go lower. They're saying that it's unresponsive. Very different.

To the last they say there is fear, that everyone is selling. The best time to buy is when everyone's selling. I don't think the pros are going to wait for a turnaround. I think they're going to cause one.

I think for investors, such as myself, who buy companies with a 5-10 year time horizon, now is a great time to buy. I bought some BAC last week at 32, I bought some more today at 26, and I will be buying more on the ipo tonight (the price has not been set yet). If it goes down to 18 or lower again, I will be backing up the truck because there is no way that this company will not crush in 5-10 years. Right now the Fed is doing everything they can to put BAC, WFC (which I also started building a position in today) and JPM in a position to be profitable and dominate the banking sectore. What we are going through now is a historic realignment of the entire financial system, and I give props to Steve for predicting this well before it actually happened.
At this point in time, for people who have been sitting on cash and who have a long enough time horizon, now is a great time to begin to start building positions in companies that have been oversold and that are flush with cash. I look to industry leaders like MSFT, CB, the above banks, BA and some others.
Like Jim Rogers said, "you don't buy stocks at their peak, that's how my mother invests." What you do is keep your powder dry for opportunities like this, you build positions over time, set a price target with a flexible time horizon, and wait. I confess that I have never traded stocks and I know nothing about day trading. I do know about valuing assets (real estate, stocks, private businesses, collectibles, etc.) and having the patience to wait until they have the time to perform and pay-off. It is an old saying, but true, you want to buy low and sell high. No one can time a top or a bottom, but when you see moves like the ones we have seen over the past year, and you have the cash to start building positions, these are times when fortunes are made, again and again.

exactly, mh23

But sometimes it's not easy.

" I give props to Steve for predicting this well before it actually happened. " the question is not just calling it, words are cheap in the investment world. did you profit from it?

i agree w/ steve and mh and the rest of the guys saying we are close. when i first posted, s&p was down a couple percent, closed down almost 6%. we are now 36% from the peak. in 2000-02, s&p dropped 50% from peak to trough. while it feels worse in some ways, we didn't start with the crazy valuations we had in 2000 when s&p PE was 35x. if you strip out neg earnings of financials, s&p is actually looking very cheap. energy & commodity complex seems to have overcorrected as well, which to me smells like an opportunity.

I totally agree there are ton of opportunities out there. There is an obvious liquidation of financial assets across the board that doesn't make much sense. Some of these companies pay terrific dividends (plus growing them), are not cyclical in nature but they are still being thrown out with the bathwater.

IMO, once we get through the bulk of this month which also happens to be the fiscal year end to most mutual fund companies, we can look forward to a much better Nov & Dec. Those are are historically very strong seasonal months for the market plus the selling will hopefully be out of the way.

It does take guts, Steve. :)

"did you profit from it?"

I've said that I didn't because I thought I was protected by not investing in the US, unfortunately that strategy didn't work, either, after Lehman was allowed to collapse.

No strategy but a 2x bear strategy would have worked since then.

A chartologist was just on Fast Money predicting Dow 7,500, a 50% decline from the peak. It is very difficult for me to maintain my composure right now (as it has been since the Lehman demise) since it feels like throwing good money after bad, but I'm just not seeing the whole "global recession" thing - it's just not real. Slowdown fine - it had to to prevent inflation - but recession? No way.

These are financial issues, which resolve themselves very quickly. Sure damage has been done - no one denies it - but every measure has been and is being taken to resolve them. I wouldn't have said that last week, or even yesterday.

The most recent downturns have been in the early 80's, when interest rates were 20%. Now they're 2%. Then in 1997, caused by the Asian currency crisis, while now China is growing at 9% and all emerging market countries have huge foreign currency reserves. Then in 2001 with the dot.com bubble with p/e ratios of infinite and the "New Economy" malarkey, and 9/11 - enough said.

None of that exists right now. All that exists is that some banks need more some capital, and one idiot in Washington let Lehman Brothers fail, meaning that now nobody trusts anybody. That one stupid policy mistake has cost trillions of dollars.

As I said, all the mechanisms to right this situation exist now. It's not easy going through this. There are too many talking heads on the TV talking about "global depressions": don't you think we learned enough about the last depression to stop it from ever happening again?

Here's my point:

"The S&P 500 slid 60.66 points, or 5.7 percent, to 996.23, extending its 2008 tumble to 32 percent in the market's worst yearly slump since 1937. The Dow Jones Industrial Average dropped 508.39, or 5.1 percent, to 9,447.11, giving it a 29 percent retreat in 2008 that would also be the worst in 71 years."

Does anyone here really believe that the economy is worse now than it was in 1937? The second worst stock market crash in the history of the country?

Really?

Truly?

This market makes no sense. It is irrational and fear-based. Bring back short selling to put an end to this volatility.

Steve and Fast Eddie Wilson these are all the things you wished for, falling real estate especially in Manhattan, hoping all the bulls would lose their values, well guys I got news for you I am not down 30% on my resales with tennants paying my mortgage.I hate to say it but DCO and the rest of you couldn't wait for the dow to hit 10,000 so you could say see I knew it would happen, well it happened and worse, a global meltdown ( be careful what you hope for).

Right now fear, coupled with a need for liquidity, are driving the markets. Fundamentals have been discarded, and stocks are being priced to reflect a collapse. I like the way that dichotomy plays out. If there is a true economic collapse, equity positions will be secondary to survival. Or, in the more likely scenario, if in fact the market is reacting based upon fear, then there are opportunities to start building positions.
The mistake that most people make is that they fail to give themselves the benefit of time. You should not buy stocks if you don't have the ability to wait a year or two more to achieve your target if need be. Too many people are greedy, they chase the herd at the top, get crushed on the way down, and panic and sell at the bottom. Disciplined investors take profits as they achieve their short term goals so that they are loaded with profits in cash to benefit on the next downturn, and there is always a downturn.
I have no idea when the bottom will come, however, I know that in five-10 years BAC, WFC will be the beneficiaries of all the chaos and Fed moves that are happening today, it is so clear to me. Now, when I see a company that I am building a position in sell off 25% in one day based upon the CEO making prudent moves that are necessary to fund cheap acquisitions and enable growth, at the same time the government is falling over itself to strengthen that company, I rejoice at the opportunity to buy so cheap. I like LEwis because he is honest, he cut the dividend, said that conditions suck, he is doing workouts for a lot of Countrywide's mortgages and he pre-anounced to raise capital, and he didn't care a whip that the market would react the way it did, that is the type of CEO that I want for my company. Same at WFC, where it looks that they are getting the cream of wachovia's deposits and branches. These companies are positioning themselves to be enormously profitable in the next 5 to ten years. I am sure there are others .

zorter, you couldn't be wronger.

"Fundamentals have been discarded, and stocks are being priced to reflect a collapse."

mh23 is correct. Prices are at a level representative of depression. Every expert says it. And yes, stocks are being liquidated because people need money and they can't get it. They can't get it because of the Lehman fiasco that should have never happened.

My concern is that this erosion of wealth - $2 trillion this week alone - will, in fact, have an effect on the economy, when it doesn't need to.

Hopefully, with all the liquidity being injected into the market, this will stop shortly.

"mh23 is correct. Prices are at a level representative of depression. Every expert says it. And yes, stocks are being liquidated because people need money and they can't get it. They can't get it because of the Lehman fiasco that should have never happened."

And this is different from the CNBC talk you're angry about? Exactly how?

"My concern is that this erosion of wealth - $2 trillion this week alone - will, in fact, have an effect on the economy, when it doesn't need to."

I can sympathize with you about the wealth evaporating in a cloud of smoke, and I'm sorry if you've lost money, steve, but I fail to see how on the same day you make the above statement you're urging people to write to CNBC to stop their unhappy-talk.

The only problem I see in jumping in, although there are certainly some opportunities, is that I think what we are seeing is a not a crash but a correction. A big correction. Certain sectors that were traditionally slow and steady dividend stocks ie. finance and commodities were as much bubbles as real estate. My point is that while things will rebound, probably before the new year, it will be a slow steady rebound not a GOOG is doubling again this year rebound.

steve, we are on the precipice of the housing crash you have predicted. Did you think that housing would fall 30% or more and the economy would somehow be unaffected? The stock market, which is primarily driven by its calculation of the future value of homes, is down 30%. Corporate earnings and interest rates are out of the window. All anyone cares about is the discount as which the Treasury buys the mortgage paper from the banks. Is is 30%, 40%, more? That's what is driving the market. I tell you Wall Street has moved to D.C. and you laugh. It is a joke but it isn't funny. And steve, you, as the poster boy for the bear market have now become the poster boy for "be careful what you wish for, you may get it"

I mean steve is the poster boy for the housing bear market

And I mean the stock market today is trying to find the level of housing prices relative to 2006, the last reliable year for housing number. I know a lot of clarifications but I hope you get my point.

"I fail to see how on the same day you make the above statement you're urging people to write to CNBC to stop their unhappy-talk."

That's not what I'm saying. What I'm saying is that, in a highly liquid market, rumors can make a huge short-term impact, and false information has the ability to damage the real economy. If I hear "global depression" one more time ... it's simply not true.

"Did you think that housing would fall 30% or more and the economy would somehow be unaffected? The stock market, which is primarily driven by its calculation of the future value of homes, is down 30%."

The stock market is not driven by its calculation of the future value of homes. It is driven by expectation of future corporate earnings, and is therefore a leading indicator. Housing falling 30% does not necessarily need to cause any real problem because it is an illiquid asset and therefore no one needs to lose money. The problem is foreclosures and defaults, and their effect on the balance sheets of banks.

I repeat - the stock market has nothing to do with housing prices. The two are completely uncorrelated.

Now then, if you look at my posts after Lehman you will see that I predicted this mayhem if nothing was done to stabilize the markets. I was right, but I was too right because I didn't predict this level of volatility. Today's action by central banks, and tomorrow's lifting of the short-selling ban, should do a lot to lift stock prices. No one wants to be long because they can't hedge their bets by being short.

I believe that the market is seriously, seriously oversold. The Dow Jones is trading at something like 14x earnings, rather than its usual 18x. International stocks are trading at 12x, their lowest since 1987, discounting all future growth prospects. Of course there will be a slowdown - it was necessary after years of growth. But not a depression.

I thought BSC would be the bottom, and it might have been had it not been for the Lehman fiasco. Really - doesn't somebody as smart as Hank Paulson know that you can't let a bank fail, as the banking system relies on trust? So ingrained is this that even our bankruptcy law does not allow for recovery of a financial institution; as soon as it goes bankrupt, it is liquidated quickly and orderly. What was he thinking?

But the damage is done. With luck, with recent actions by the central banks and the start-up of TARP and the Fed's buying commercial paper and the expiration of the short-selling ban, we will have reached bottom. If we don't - and those criticizing me for wanting CNBC to stop broadcasting all this doom and gloom - the erosion of wealth will have an even greater negative effect on Manhattan real estate.

"Fundamentals have been discarded"

The best contrarian indicator anyone can hope for.

steve, I repeat, the future value of homes is all that matters for the stock market. The market is trying to find a level where it can stop falling and start rising. That level is intrinsically tied to where home prices need fall before they start rising again. Inflated housing prices have caused the credit markets to seize up, The Fed is lending directly to companies as banks will no longer lend, the stock market is crashing as hedge funds and other institutional investors sell their assets, liquidate large futures positions, to meet the banks margin calls and new capital requirements. I-banks would let hedge funds lever up 5-1 via their prime brokerage units, lending the hedge funds the rest. Those days are over.

McCain wants to buy all the bad mortgages. Paulson wants to buy all the bad mortgage based securities. Either way housing is the 500 lb rock sitting on the market's chest.

You want a housing crash, different from the 80's, well, you got it. Have the courage to look it in the face and see what it is. Do not consult your online econ seminar. Open your window and see what's going on out there in the world. Rate cuts after rate cut and we're still not even close to capitulation.

The fundamentals have not been discarded. The market has switched drivers mid-race and the people watching from the sidelines are confused. The market does what the market does. It's really only after it reacts that you can try to figure out what it was thinking. Kind of a like a bad relationship. But, hey, that's the stock/debt market. What a life!