Monday, October 27, 2008

Capitulation is a MUST Before we Bounce

Good Afternoon Everyone!

Lets go back in history to 1929 and take a look at a chart. We need to capitulate like we did in 1929 before we bounce:

I have been listening to the bottom callers all day on CNBC that are looking for a significant bounce. I find it funny because they are all trying to cover their butts now by saying "we have hit a bottom, BUT I am not saying this is the bottom". I guess the "bubble boys" figure maybe now its time to add a disclaimer to the end of their bullish claims that NOW is the time to buy. What fools.

My other favorite pigmen line right now is "I think now its time to start nibbling on the consumer staples". Folks, this is the bulls way of saying "Run for the hills!". Anytime you hear them advising you to buy healthcare and consumer staples...Run for your life! God forbid they actually tell you the truth when they think the market sucks!

I am even starting to see some bounce calls on some of the bearish websites that I like to follow. This surprises me. Trading 101 in bear markets tells you that you need to have capitulation in stocks in order to wash out all of the weak longs before you begin to see any type of tradeable bounce.

Art Cashin has been saying this for weeks. Look at the chart above, we needed a "Black Tuesday" in 1929 before people felt comfortable jumping back in. When the market psychology is horrific and the market slowly bleeds everyday, you create a situation where the bulls aren't confident in going long.

This results in a "no bid" environment as people continue to sit on the sidelines. Any bounce is immediately sold into. Today was a perfect example. When the market jumped 200 points in the afternoon the bulls immediately sold into the rally. The bottom then fell out in the last hour as the buyers went back to the sidelines.

I simply cannot see any chance of a significant bounce until we see a 1000+ point down day on the DOW. The lack of trust, confidence, and continuous bad news simply is too much for the bulls to overcome. Psychologically, they are a mess right now. If you were a bull and walked into a pysch ward right now, you would end up in a straight jacket.

Capitulations are certainly not fun, but they are badly needed at times. Today would be one of those times. Investors need a reason to buy. They need to psychologically think that they are jumping in near the bottom. The problem we have now is how on earth can you have the confidence to buy when the DOW slowly sinks day after day?

I believe a washout is the psychological shift that is needed to pull us out of this for the short term. This will bring many buyers back into the market. Why? Because everyone knows the playbook. Brutal bear markets find bottoms after capitulation. Its been this way all the way through time. The smart money like Art Cashin knows it. He isn't going to send his clients back into this tsunami until he sees the classic signs of capitulation. That goes for every other veteran trader that's worth a crap on Wall St.

In this modern fast paced world we always love to say "its different this time".

History has almost always shown that this is never the case.

Bottom Line:

I continue to hold onto my shorts that I bought on Friday. I grew a few grey hairs in doing so today though due to the volatility! I will probably sell them off on any serious tankage. I see no significant bounce until we see a sharp capitulation type selloff.

We have the Fed back in the picture over the next couple of days. I am sure we will see more rate cuts. I kinda see this as a non event at this point. A half a point rate cut is nothing after bailing out the whole financial system!

We somehow need to restore confidence before we start moving higher.

I'll end this with some more great news:

"Oct. 27 (Bloomberg) -- Yields on Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds soared to the highest in more than seven months relative to government notes, potentially boosting home-loan rates.

The difference between yields on Washington-based Fannie's current-coupon 30-year fixed-rate mortgage securities and 10-year U.S. Treasuries climbed about 21 basis points to 224 basis points as of 3:45 p.m. in New York, up from 162 basis points on Oct. 20, data compiled by Bloomberg show. A basis point is 0.01 percentage point.

``It is the deleveraging,'' Mohamed El-Erian, the co-chief executive officer of Pacific Investment Management Co., said in a Bloomberg Television interview today from Newport Beach, California. ``There are still people who absolutely have to liquidate, and that is keeping a number of the spreads in the high end of the markets much wider than they should be.''

The average rate on a typical 30-year fixed-rate mortgage climbed to 6.08 percent at the end of last week, after falling to 5.92 percent on Oct. 22 from a two-month high of 6.38 percent, according to data. That compares with as low as 5.72 percent last month."

Sigh...Just what we needed: Higher mortgage rates!

Stay tuned


teddy bear said...

Jeff do you have rank of pigmen? :D
There is a good candidate for high score. :D

(remark: several videos loading one after another)


OCC's Quarterly Report on Bank Derivatives Activities


Jeff said...


Thanks for the OCC. Put that on my favorites list.

Those derivatives scare the daylights outta me!

It looks like the treasury auctions went terribly today. That was the reason for the dump.

Credit markets are still extremely unstable.


Anonymous said...

Would you call this a bounce today?

Jeff said...


That was a bounce alright but not a tradeable one.

Volume was low. I am working on something now.