Craving Capitulation

So was yesterday's market action enough to make you throw in the towel? Did the constant bleating coming from the talking nanny goats on CNBC scare you sufficiently to sell all of your stock holdings and go to cash? If so, welcome to the world of total capitulation. That is when the individual investor turns into Popeye and says, "that's all I can stands; I can't stands no more.?

So, is that you bunkie? The phenomenon know as capitulation is an important indicator of future market movement. If we have indeed reached that point, then fear is the dominating emotion and the stock market most likely is at its cheapest point. I call the scenario "shaking out the riff-raff", because most folks can't handle severe market declines. The fear factor takes over and they bail. Inevitably, the market goes back up. The best example I have of this is March of 2009 when the stock market on the Dow hit 6,500 down from 14,200. That was the breaking point; you all bailed, and the market marched forward 70% in 9 months. It was a great move and one of the more bullish in history and my guess is that most of you missed it having sold your holdings back in March.

That is the face of capitulation.

So, did we hit it yesterday? I don't think so. Make no mistake, yesterday was not fun, but I think people are still kind of shell shocked. I still don't believe that folks are in this market given the volatility and the bad news bombarding them everyday. So, if they are not in the market, they can't get out en masse. That's the point. For now, the market is in a trading range between 9,800 and 10,300. The S&P 500 index got very, very close to breaking support at 1041. All of the pundits were saying that if the index closed below that level and stayed there for another 24 hours, then the next support was at 980 or about 6 percent lower. We could see that. Would that get you to bail? I still think not. For the time being, we have bigger fish to fry than a 6 percent down move. What are we going to do about a free market economy that, everyday, gets less free. That is the real issue. Until we start to get answers about government spending and money policy vis-a-vis de-leveraging, the market stays locked into a short trading window.

Here's what the individual investor ought to be doing while bemoaning a government out of control; learn as much as you can about markets and investing. Start by reading THE INTELIIGENT INVESTOR, by Benjamin Graham and Thomas Dodd. Drop me a line and let me know what you think. After 25 years in this business, it remains the best book I have ever read about understanding the stock market.

Til next time.....