Capitulation? The Evidence is Decidely Mixed

It looks like we have mixed evidence as to whether last week represented a Capitulatory low. My best guess is that last week will be an intermediate, though not final, low mark.

In the plus column, we have:

-Record levels of Short Interest;

VIX spiked up over 30 (this has not been a good entry in the past);
-Merrill Lynch survey shows Fund managers running very high cash levels
-1,304 new lows on the NYSE, we saw (a record high).
-The Selling stampede lasted 39 days — unusually long
AAII Bullish Index dropped below 25 again
-A short term peak in blog traffic

In the minus column, we have:

-Volume picked up, but didn’t match the levels seen in January or March lows;
Bottom callers are out in full force (that’s rarely seen at ultimate lows)

-Merrill survey have showed high cash levels in January, February (and here) and March and June; As often as not, stocks went lower;
VIX at 30 may be good for a bounce, but  it is far below true panic lows of the past;
-A majority of economists believe the US will avoid a recession (why are they always the last to know?);
-Confidence levels dropped significantly, but not to prior extremes (see chart below).

Not quite down to the lows seen in October 2002 or March 2003, when the Nasdaq was off 78%  . . .


Thanks, Ron!


UPDATE: July 21, 2008 2:15pm

Several people have written in to note that the Barron’s chart seems to be understated in past major events — 1973, 1982, 1987, etc.  I do not know why — or if the chart has been changed over time — but I will inquire.

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  1. michael schumacher commented on Jul 21

    I’d hardly call record levels of short interest (highly debatable IMO…what exactly is your source on that?) a PLUS for the market. However this is not the first place I’ve seen that being used as a reason to jump in. Your bias is too apparent now BR…


    BR: Biased?

    High SI is often a net positive, providing a floor under stocks; Squeeze can lead to rallies.

    I am not sure I understand your comments.

  2. DL commented on Jul 21

    Definitely not the final low.

  3. CPJ commented on Jul 21

    Does anyone else view last week (Wed-Fri) as nothing more than the market blowing out all the put option holders right before expiration? I was WAY in the money on about ten different securities – the sellers of those contracts were going to be slaughtered if they expired at Tuesday’s levels.

    Manipulation, just in time for option expiration. Nothing more. That’s my take.

  4. John commented on Jul 21

    For most of the reasons you mention, not all, your short interest premise is iffy as others suggest, I agree this is likely not the true bottom. Much important than these, some of which are symptoms rather than disease, are the fundamentals. Consumer spending and just as important allocation, the budget deficit, employment and profit outlooks, all stink. Were in the first six months of what looks like a rather nasty period. That said we’re probably not going to see another traumatic slip either. The Dow bottom is at worst mid tens I’d have thought. That at least is the scenario I’m assuming for my own investment plans.

  5. Scott Frew commented on Jul 21

    Bloomberg reporting Lehman’s chief global strategist just cut his year end number for the S&P to 1450. Now that’s what I call capitulation!

  6. Steve Barry commented on Jul 21

    1. Short Interest – the short interest I look at on QQQQ and its top names (GOOG, AAPL, RIMM, MSFT) are at levels I call laughable…short ratios one and lower. Maybe I’m too narrow focused, but that’s the market I play in. I find it hard to believe the broad market has bottomed with these high profile, high risk stocks so complacent.

    2. I’ll post my customized put/call chart. Market doesn’t bottom until 10 day MA is 1.25 or higher after a downturn like this…and today’s move makes that day even further away. It is actually more likely we have now seen a top than a bottom.

    3. Nobody here ever talks about the commitment of traders report…it shows that in equity index options and futures, the dumb money is long, not short.

    4. VIX must soar over 50% to reach recent highs of fear.

  7. Eric commented on Jul 21

    For what its worth, my call for an inflection point (not even a bottom) is when corporate default rates reach 10% and the CDS market holds up. Until default rates reach 8-10% we’ll continue in a downward spiral with occasional short-lived rallies. If the CDS market does not hold up in the face of 8-10% default rates, then we are talking armageddon time.

  8. michael schumacher commented on Jul 21


    There was no link to the short interest in the original post put up this morning.

    Didn’t think I’d catch that did ya??

    Minyanville???? Come on at least link a short interest site or the put/call ratio….

    BR: That was a typepad glitch that was fixed immediately.

    You seem to see nefarious intent everywhere dude . . . switch to decaf!

  9. VoiceFromTheWilderness commented on Jul 21

    If you think the confidence index is bad now, just wait til people figure out that this isn’t 2003. There is almost nothing comparable about the geo-political situation, the US government financial situation, the US economy in general, or the larger world economy between then and now.

  10. Steve Barry commented on Jul 21


    Here…look at these short ratios…use the dropdown list to see QQQQ and the names that inspire animal spirit. There is no fear there…no short squeezes to come…no pent-up buying power.

  11. Jim D commented on Jul 21

    For this to be the low, bank losses would have to stop (not moderate, STOP), and the consumer would have to restart their buying binge.

    Yeah, that’ll happen.

    S&P 500 went above 20 day MA today for the first time in months.

    If it can stay there, maybe, just maybe, this rally will outlast the week. My money is literally betting against that. But the rally is barely holding on today.

  12. michael schumacher commented on Jul 21

    That was my point…it’s virtually a non-event. I laughed when last week’s “rally” was so easily put down to short covering. Some of it was but indexes DO NOT stay at high’s (thus creating new ones on the minute it seemed) by just shorts covering. The lack of any substantial post from our host here regarding the various other activities that ALSO contributed (much more IMO) to that just screams out (at least at me it does).

    I guess if you “called the bottom” it makes for an easily digestible reason as long as you don’t do any research.


  13. Eric Sebille commented on Jul 21

    Was the record high short interest in 1929 a plus for the market?

  14. Steve Barry commented on Jul 21

    I have been know to complain about CNBC cheerleading for sometime…this Sue Herrera treats the market like it was her own small child…”oh look what market did today.”

    Today offers further proof…Dow is now 35 points off its low of today and 93 points off its highs. How does Sue call it?…”market well off its lows.” It is insane already.

  15. RW commented on Jul 21

    Since 2000 at least, or maybe 1998, it seems that virtually all the US markets have had extremely ragged edges in both time and play and I see no reason a capitulation should be any different; I’m starting to think of the noughts as the dubyas (yeah, yeah, so sue me).

  16. jdd commented on Jul 21

    Until the Fed revises its growth forecast for 2009 and I see at least one quarter of negative growth, I’m assuming optimism is irrationally high.

    I cannot not understand the reasoning, much less agree with the viewpoint, that the US isn’t going to have its ‘economy’ shrink. The national statistics don’t reflect my observations in CA. I think CA must be both worse off and ahead of the curve. Tight credit is still only just beginning to force companies out of business and force more layoffs.

    It is the effect of the layoffs that will send us negative.

    And I just don’t see enough people admitting that 2009 is going to be just as bad, if not worse, than 2008. My guess is the market will foreshadow that change in viewpoint and the DOW will be 20% lower than these past lows.

    That said – watch the market rally on July 31 when the GDP number for Q2 comes in at 2%+.

  17. dba commented on Jul 21

    learning about chart reading and read some tech analysis blogs. looked at some charts this weekend and it does look like an intermediate low for a few months at least. maybe even the real bottom of this bear market.

  18. michael schumacher commented on Jul 21

    “BR: That was a typepad glitch that was fixed immediately.”

    A glitch……ok. As in the movie “office space” I’m sure.

    “You seem to see nefarious intent everywhere dude . . . switch to decaf!”

    Nothing nefarious BR….just hate when people get sloppy. Short interest is a non-event and you know it. It’s too bad you can’t or won’t see that FWIW.



    BR: It was one of the factors on THAT side of the ledger. I tried to list as many as I could think of, pro & con.

    But you are missing the big picture, and thats whether or not this is a capitulatory low. I thought I made that clear in the 2nd sentence.

    Don’t miss the forest for the trees . . .

  19. D. commented on Jul 21


    Wait until investors need to dip into their investment portfolios to support their lifestyle.

  20. John commented on Jul 21

    I’m with you. The fundamentals stink, and this recession has only just started. For some reason this market seems more irrational than I’ve ever seen it in 40 years, jumps on the most scanty of evidence or contrarian evidence etc. Basically I put it down to the fact that a clear majority of trading is now programmed bank and hedge fund activity. Stanley Kubrick was onto something.

  21. DL commented on Jul 21

    My take is that we won’t see the final low until after Obama takes office.

  22. Robert commented on Jul 21

    Probably ‘a’ low, but not ‘the’ low. I have noticed an abnormally large number of people calling a bottom. Maybe I’m just more tuned in. I did notice on the two big up days last week there were come talking heads suggesting this was a bear trap which makes me think its not…

  23. constantnormal commented on Jul 21

    I confess to being in the “no bottom yet” crowd. The dismal prospects stretching out before us for as far as the eye can see — debts, deficits, dollar debacle, housing debacle, banking debacle, strapped consumers, and no champions in evidence for any course of action that would alter things — lead me to believe that eventually the believers in “the bottom is behind us” will realize that there is no pony in this mess, it’s crap all the way down.

    The question is, how long will it take the ebullient among us to come to this realization? That will be the point that we can have a real capitulation of terror, when everyone throws up their hands and expects the end of western civilization, or at least their own comfy lifestyles.

    I doubt that it will be anytime soon. The impending election will keep the sheeple distracted, and the PPT will keep intervening to prolong the illusion of sound markets and safety. Possibly the continued stream of horrible skeletons and revelations emerging from the crippled financial companies will do the trick, but I doubt it, what with Uncle Ben showering any and all with free (and increasingly worthless) money.

    After the next administration takes office (whichever one it is), and is forced to deal with the realities of their situation, then we might see some straight talk and actions designed to slow the rise in debt and inflation (hey, I’m an optimist), as they know that without some sort of change, they won’t make it to the end of their term without a catastrophe (a President McCain might have been persuaded otherwise by Phil Gramm, but “doctor” Gramm has already shot his own feet off and is no longer a factor (except for possible criminal prosecution and blame-scaping)).

    That leaves me with an uncomfortably large interval in which the direction is uncertain and can change at a moment’s notice. Yuck.

  24. JS commented on Jul 21


    Thanks for the evidence and links for both sides. This type of balanced information is value added and I appreciate your assessment as well. Very hard to see this being the ultimate low, but maybe I am selling financial engineering short…

  25. Bruce commented on Jul 21

    The leading economic indicators today indicated a decrease in the money supply…where can I go to find how this has been trending…?

    thanks in advance

    Bruce in Tennessee

  26. Bruce commented on Jul 21

    Never mind…found it. Thanks.


  27. blin commented on Jul 21


    Lack of interest in this post indicates that most people are bullish. Yet the index that matters most (S&P) has not given any kind of a buy signal.

    I’m not sure which way we will go from here, but there still seems to be quite a bit of complacency out there.

    Good luck bulls, I think I’ll wait for a signal before I jump in.

  28. jj commented on Jul 21

    Hi Barry,

    excellent information here- especially from Mr. Barry. This gentleman makes a good strong case.

    On a personal note, when the S&P was kissing the 1200 mark, I certainly did not get any roller-coaster feeling. It felt more like a walk down a flight of stairs. It just didn’t feel like a panic bottom – for instance, where was the panic?. If you can measure the strength of the capitulation by the degree of the panic, this wasn’t registering much.

    VIX of around 30 spells caution, or “honey let’s get in the car before it rains”.

    Vix of 45 is closer to what is happening to you now – when perhaps a minute or so ago you were standing on the beach and at that moment realised that, yes, what you were looking at must be what they call a tsunami.

  29. zell commented on Jul 21

    With the caveat that the market and the economy can be two different animals at times, where is the good news on Main Street? Gov’t bailouts to avoid a train wreck? You can’t eat the VIX. The market han’t begun to look for a bottom. That’s when retail investors stop opening their monthly statements. Groans have to be audible when the bottom is near.

  30. Tax Lawyer commented on Jul 21

    “-A majority of economists believe the US will avoid a recession (why are they always the last to know?)”

    Look at the top economist bloglist at They are incredibly bearish, and most believe that we are already in a recession. And if you want to know of the future, go to, which has an almost perfect record over its 7 year run.

    Most economists are tools of the GOP (or corporate America), because, well, that is where the money is. If they accurately reported that the sky was falling, they’d simply be on the steet looking for work.

    The top bloggers, on the other hand, often work for Universities and in tenured positions. They generally care more about the truth (and thus are much more bearish), because they face no economic consequences for doing so).

  31. renoDino commented on Jul 21

    *There are four trillion reasons why this market moves higher. They are sitting in money market funds earning 2%.
    *America is for sale to the foreign buyer.
    *So far it’s inflation in the rest of world and stagflation here. The rest of the world is not broke.
    * After a major real estate bust, the market has made a Major move two years after it began.
    * All that cheap money must go somewhere.
    *99% don’t think last week was the bottom. Take that mean that was the bottom.
    *Fear last week was so great the government blinked.

  32. SM commented on Jul 21

    I keep reading about this “spike” in the VIX to 30, but if you look at the chart, it was really more of a “meander” to 30, and that is telling to me. We didn’t see panic as you often see on the VIX chart as an outsized spike. The massive 2 day rally in financials would have been there no doubt, but not as strong if Cox had not surprised the market with the unclear naked short-sale rule. I didn’t see anything strong enough to suggest capitulation.

  33. rational commented on Jul 21

    I don’t think high short interest is as much as indicator of pessimism as it used to be. There are many different ways of positioning oneself, particularly with short etfs and double beta etfs (qid, qld etc). Also, the mirror of short interest is margin. A shorted stock has to be bought back. Similarly, a margined stock has to be sold to pay off the margin loan or new funds must be diverted to pay that debt. Combine that margin debt with the huge leverage consumers took on elsewhere, essentially taking a huge mortgage on their home and using that surplus cash to invest in the stock market. Even if an investor bought stock with cash, but has a mortgage or other kind of loan, he/she has effectively bought stock on margin because stocks are generally meant to be bought with money you have left over after meeting your basic needs.

    Given the huge rise in debt in the last five years I argue that the margin side of stock market is too high relative to the other side — short interest.

  34. allcash commented on Jul 22

    OK, this is a short-term bottom but not the true bottom.

    Bank sector led the rally!!!??? Most of them are bankrupt.

    Try injecting more liquidity into FRE FNM and u will see 1200 gold and 170 oil. Use more band aid and US will become the next Japan.

  35. old trader commented on Jul 22

    Put me in the “bottom not here yet” camp. Exited SDS on 7/15….bought some back on 7/18. More like a tradable bounce.

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