Slow-Motion Capitulation By MICHAEL KAHN | MORE ARTICLES BY AUTHOR Sentiment indicators suggest that most investors have given up on the stock market by now. Will a bull market follow?
LAST YEAR, WE SAW THAT market fall apart in what can only be described as a slow-motion crash. And now, thanks to the overwhelming effects of the economic crisis, we just may be seeing slow-motion capitulation.
In other words, investors seem to have accepted their losses rather than panicking all at once. This might be taken as a sign that the market has already extracted enough pounds of flesh.
I am not suggesting a bull market is around the corner. But my experience with the end of deep declines suggests that a major bear market will not end with a final portfolio purge, the classic kind of "sell everything" capitulation that countless financial commentators on CNBC and elsewhere contend is often the first step of a meaningful market rebound.
Rather, a drawn-out period of fading interest seems to be the way true bear cycles end.
Traditional sentiment indicators seem to be floundering with the rest of our technical tools. But rather than discarding them, we should change how we apply them. In other words, looking for a sharp spike higher in the Chicago Board Options Exchange volatility index (VIX) may not be the right plan.
Investors are shell-shocked now, and since we've already seen a record high in fear as measured by the VIX, perhaps in this environment the final washout will be a process and not an event.
Ron Brock, the managing director at Sheaff Brock Investment Advisors, confirms that his clients have indeed taken an attitude of acceptance. Very few clients threw in the proverbial towel.
Taking that one step further, Eric Leake, chief investment officer at Anchor Capital Management Group, says that his clients were worried, if not scared, about the economy but are sticking with him. In other words, they are not second-guessing his strategy, and I'll take that as further proof of an attitude of acceptance.
These are not isolated cases. A TD Ameritrade Institutional survey of registered investment advisers (RIAs) found that 93% of those polled say that their clients are not withdrawing from the markets.
On the individual investor level, the American Association of Individual Investors, in its latest survey, reported that 55.1% of those polled were bearish on the market. This is very much above their average bearish reading of 29.7% and, again, suggests that most investors have already given up on the market.
What does all this have to do with charting? My contention is that investors have capitulated by their attitudes and not by panic selling as we might have expected in more normal market times. If this is true, then the market does not need to see a major decline to set a final bottom. Instead, it needs to crush everyone's interest by just calming down and only grinding out little change for many months.
I call it an apathy bottom. When people stop worrying about where the bottom will be, the market will give them one.
This sort of attitude is not limited to investors. I have been following an online discussion group where experienced professional technical analysts have been tossing around likely downside targets for the Standard & Poor's 500. Some are using such esoteric analyses as Elliott Waves. Others use more traditional methods but the argument on how far down the bottom will be was robust.
One member of the group, Alex Spiroglou, with Odin Capital Management, commented, "Whenever a market slide has become subject to a downside target auction, a bottom is usually very near."
Again, with this much discussion, in this case by active bears, the market is sure to do something else.
Sentiment analysis casts a wide net and is often hard to quantify. But if we can subjectively gauge the prevailing mood, then we can begin to understand if everyone has given up.
Many analysts simply look at the media and what editors deem worthy of putting on their front pages. After all, the front or home page is what draws readers into the publication or Website, and editors position their offering to tap into what their readers want to read. So when a nonfinancial publication such as the Washington Post puts a comparison of the current market to the 2000-2002 Nasdaq and 1929-1932 Dow Jones Industrial Average on its Tuesday front page, contrarians take notice.
This sort of major coverage suggests that the public is indeed very bearish and has already done whatever selling they are going to do. Again, it is an indication that investors have given up on the market already.
Traditional technical reads on sentiment may be shaky at the moment, but if we piece together all these bits of subjective evidence, the case for market capitulation becomes plausible. And that would indeed be good news for investors, even if it does not tell us when, even on the order of a dozen months, when the bull might return.
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