Me Media: What is Capitulation?

Remember when trading was not all “up in your head”?

We’ve all switched to the marriage counselor’s version of investing. Crap.

I give up.

Is that capitulation?

Chuck Ponzi

My first sign of capitulation: Jim Cramer. When he’s cowering underneath his desk as if he was taking mortar fire, then it’s a bottom. Otherwise, every sell-off will just prompt another short-term oversold reversal call.

Same line of thinking applies to real estate.

Steve C.

We always get real fear at the end of a Bear Market.

ALWAYS

When everyone is asking if we’ve hit bottom, it means that we haven’t.

Well, as a general thought…if you are one of those folks who, in a bear market, keeps jumping back in and getting burned…trying to “catch the falling knife”…then you should find someone with more common sense to manage your investments…

If your financial adviser does the same thing…fire him and find one with more common sense….

it really isn’t that hard…but we do learn the costly lessons finally…and I am in that crowd..

This time around, we will not be anywhere close to a bottom until the viability of the financial system itself is questioned. To date we’ve had an “orderly” series of failures because the underlying cause has been the housing collapse which itself is a slow motion event.

However, we are now starting to see the snowball pickup speed as it rolls down the hill. Lehman, Citi, BoA, RBS, DB, Fannie, Freddie, GM, the entire commercial real estate market, etc. etc. are all highly vulnerable. Put two or three Bear Stearns sized failures together in a trading week and only then will you have blood on the streets. And don’t think about buying then either as it won’t be a v-bottom. You have to look beyond 2010 for any real recovery.

Happy I dumped my UYG at the end of Tuesday’s session !!

Lots more volatility now – could be very close to a short term bottom, there was a lot of wholesale selling today into the close.

The real bottom? Not even close. There is still no general panic out there – some dining companions recently chastised me for taking too much “risk” by selling in August. Interesting mind games, since they must be down about 20%…..

The capitulation if and only if 401k rank and file investors no longer invest in equities. We are not there and may never get there as long as there are mutual fund families with big advertising budgets and unmerited respect, eg, Vanguard, pushing the mantra of “stocks for the long run.” Also, pundits like Jeremy Siegel have to have a stroke that renders them mute (nothing personal, of course, Jeremy). Thus, i recommend TIPS, gold, or moving to Switzerland if you want to make money that you can leave to your kids..

half of the people are waiting for a short term bounce and position accordingly.
half of the people are waiting for a significant new low from feb-march lows.

so what would the markets do? probably sideway action, vix to 20, till people get bored, anxious and give up their positions…

Hussman had a good discussion a couple of weeks ago No Capitulation

A little while back he had a reprint of something he wrote in 1998 in which he describes something akin to the The Kübler-Ross grief cycle, e.g. anger, denial, etc., Bear Market Insights

Both of these seem to be generally consistent with Barry’s views. I thought the second article useful in keeping in mind, when you own a bunch of short ETF’s, “history may not repeat, but it does rhyme.”

From a newsletter dated 5/12/1997 written by Jay Shartsis of R.F. Laffery & Co..

1974 – What does a real market bottom feel like?

Until the recent spectacular rally, the past few months had not been very kind to investors as the long awaited 10% connection finally arrived. For many stocks, especially formerly highflying OTC technology issues, the damage was far worse. No doubt some real pain has been experienced, but I thought it might be enlightening, and funny too, as you shall see, to examine the climate and attendant sentiment when the last great bear market was in its final months. That would be back in the summer and fall of 1974, the tail end of a ferocious bear market that began late in 1968. The great post-war bull market ended in November of that year with the DJIA over 1000. It had come up from 160 in 1949. ‘Twas a time much like the present, of unbridled optimism, hot new issues, soaring stock prices, money manager ‘gunslinger’ hero’s – the ‘Go-Go’ years. The slide, for most stocks, wouldn’t end until the fall (October) 1974, six long years later. The average loss during that period for a NYSE stock was 75%. (You read it fight). The average loss over at the AMEX was an unbelievable 88%.

By the time it was over, stocks were not, as you can imagine, a must own investment. The number of people who were still certain of the long-term up trend in stock prices must have been reduced to perhaps several dozen, not upwards of 200 million. After getting their heads handed to them for those six years, there was very little discussion among investors of building their retirement nest egg in the market. No talk at all of getting more “aggressive” in their investment approach since a meager 15% return the prior year was pitiful, compared to say, the Beardstown Ladies’ results. In short, the stock market was a national joke, though no laughing matter for millions of people who were wiped out. Only the shorts rejoiced. Of course, for those prescient or lucky enough to get in near the bottom, the rewards were tremendous as a 22 year record breaking bull market was about to be born.

Let’s go back now to that fateful summer 23 years ago. In August (’74), the DJIA had taken another fearful beating, dropping 150 points, from 800 to 656, or nearly 20%. That, in just one month! Watergate dominated the national news scene and the Vietnam peace talks dragged on interminably. The stock market seemed to be a bottomless pit. Average daily volume for the month of August was about..13 million shares. The black humor of the day was captured perfectly by Barron’s Alan Abelson and I quote liberally from his column, “Up and Down Wall Street”, for this article. After reading his observations from that time, I think you’ll see why he’s been around so long. He was terrific and still is.

0n September 2nd, Abelson reported that “window ledge space on Wall Street is selling at a premium. He picked up that piece of intelligence from a fellow who got his space early and claimed folks have been falling all over themselves to sublet.” From early June (’74) until late August the DJIA had collapsed over 200 points from 850 to 650. That was a 24% decline in 11 weeks and would be equivalent to 1700 points today. Alan commented that “at this rate, we’ve still got a sporting chance to reach zero by year-end. Admittedly conservative however, we rate the odds no better than 50-50”. Very few stocks escaped the whirlwind, which prompted Abelson to remark that at least the “ill wind” silenced those hoary commentators, (all of whom have repaired to their former professional haunts in used car lots,) who never tire of proclaiming that, “it’s not a stock market, it’s a market of stocks”. (Sound familiar?) He further noted that in contrast to similar market “disturbances” in the past, no brokerage house had yet felt compelled to take a full page ad to warn investors not to panic. Alan attributed this failure “not so much to a belated recognition of the virtues of panicking, but simply to the fact that no brokerage house these days can afford a full-page ad”.

As for the anxiously awaited summer rally, there was one in mid-July. AbeIson observed, “A funny thing happened last week. Stock prices went up. No kidding! We’re sorry if you happened to be at the beach or counting gold coins in a dark corner or snoozing beneath a spreading chestnut tree. Because its one of those rare phenomena, like an eclipse of the sun or an honest politician that occur only once in a blue moon. And there’s no guarantee it’ll ever happen again within our lifetime”.

He goes on to say, “At the very least, Fridays action takes the wind out of the sails of those unreconstructed cynics. We mean the wise acres who have been so skeptical about one of the Street’s most reliable traditions, the summer rally. Nothing in the book, after all, says that the summer rally has to last for more than a single session”.

The rally, spearheaded as it was by what used to be known as growth stocks, came in just the nick of time. It saved many investors from making the second biggest mistake of their lives- putting up more margin (the first, of course, was haying stock to begin with). It also literally (if perhaps only temporarily) proved a life-saver to countless investment officers of bank trust departments. Those are the chaps, remember?, who espoused the one-decision approach to growth issues (in case you d6n’t recall, the notion was that one could buy such issues serene in the knowledge that one would never have to sell them because they were immune to the normal investment vicissitudes). Well, the poor souls are still committed (we wish we could find another word) to the one-decision idea – but the decision now is whether to jump or not. Friday’s rally kept them on the ledge. Barrons- July 22, 1974 Investors Intelligence reports that 67.2% of advisors are bearish, the highest percentage of negativism since the survey began in 1963, P-E ratios are the lowest in two decades and the DJIA is at one times book value. It hadn’t been that low since 1949. Now in 1997, the DJIA is at most 5x book value. Note that the huge bear crowd was right! The bottom wouldn’t come for 9 more weeks and much lower prices.

In early September, with the ultimate market bottom about one month away, Merrill Lynch finally gave in and decided to allow customers to sell naked calls (a bearish strategy of course), a maximum of 50 contracts for accounts with $125,000 in Equity. Barrons correctly suspected that this was a sure sign that the bottom was near.

The big draw at the time was the “hard money” crowd of advisors. On October 4th and 5th, 1974, James Dines, ‘the original gold bug”, held a gold seminar that was strictly “Standing room only”. By October 4th, the DJIA had collapsed to 585. Ironically, the market was putting in its final bottom as the conference was underway, but not a single speaker at the conference offered any hope for the stock market. With the DJIA at a 12-year low, nobody felt a rally was near. The lowest PE ratios in 25 years and a decline in record high interest rates didn’t tempt them. One of the speakers, a Dr. Ralph Borsodi, who had authored 17 books on economics, declared, “the world faces a depression, akin to the German depression of 1923”. He thought that “we face the probability that the dollar will become virtually worthless and that some form of totalitarianism will eventually take over because capitalism will virtually have committed suicide”!

A New York Stock Exchange seat sold for $66,000 in September. Here in 1997 one fetches $1.3 million. Houses, by the way, sold for $35,000.

October 7, 1974, Up and Down Wall Street – Several brokerage firms have printed up brochures instructing their surviving customers on “How to tell the end of a bear market”. Too bad Abelson quipped, that these educationally minded chaps never got around to sending out the companion pamphlet. “How to tell the end of a bull market”. One of these brochures listed ten things to watch for that indicate the likely end of a bear — pessimism, odd-lot short sales, high cash positions of mutual funds… the usual stuff: #10 on the list caught our eye though, “You yourself probably are apathetic regarding the stock market and find yourself primarily interested in other vehicles for investment”. Like what, we wondered? Apple stands? Things had gotten so bad that one of the major banks had instructed portfolio managers in its trust department not to buy stocks until further notice. In fact, many institutions were issuing similar warnings.