Tuesday, November 4, 2008

Capitulation or no capitulation?

There seems to be some debate about whether we saw enough of a decline to represent capitulation at the Oct. lows. I've seen everything from "the decline was too orderly" to "they didn't sell them hard enough" used as an excuse for why the bottom isn't in yet and this rally is going to quickly fail. Let me point out that we are always going to hear that at bottoms. I heard it at the 02 bottom.

Now take a look at the charts and you tell me if we went far enough to represent capitulation. Volume spiked higher than any other time in history. New lows pushed higher than any other time in history. As a matter of fact new lows almost doubled any other low in the last 28 years.
The Vix spiked to almost 100, again dwarfing any period in the last couple of decades except maybe Oct. 87.

So what do you think? Does historic extremes never before seen in the history of the stock market represent a selling climax or not? Some times I have to wonder how these people can come up with these off the wall ideas. Actually I know exactly how they come up with it. They went short as we were making new lows and now they are on the wrong side of the trade. They are trying to rationalize why they should continue to hold on to a losing trade.

As we've witnessed many times, investors want to be right more than they want to make money. I mentioned some time back that when I turned negative on energy a portion of my subscribers who were energy bulls left. I can't tell you how many e-mails I received trying to convert me back to bullish. Fundamentals this fundamentals that. Fundamentals be damned it was a parabolic spike for heavens sake. That has nothing to do with fundamentals and everything to do with emotions.

I'm getting the same thing happening now with many of the bears who some how aren't satisfied with a historic decline. They think the market should somehow go straight to zero. I'm not even sure that would satisfy some of the perma bears. Now that I don't confirm their position they need to find someone else who does. Again it's more important to be right than to make money. I suspect that when the rally runs out of steam and I turn bearish again many will be back but likely with a smaller portfolio because they couldn't take the small loss when they had the chance and they couldn't change their mindset.

Now let me say that anything is possible. The market could roll over again quickly and break to new lows. However the odds are against it. If you bet against the odds you will eventually lose. That doesn't mean that you will always win by betting with the odds either, just that your chances of making money are greater. I've got news for you. Since none of us can see the future the best we can do is to keep the odds on our side.