I guess the fact that many of us are still looking for a market bottom suggests that we haven't reached the point of capitulation....
http://www.thestreet.com/markets/marketfeatures/1345214.html
Waiting for Investors to Cry Uncle? Here Are the Signs of Capitulation
By David A. Gaffen
Staff Reporter
3/14/01 8:23 PM ET
Another brutal day, this time without a real bright-line reason. Japan in trouble (is that news?), Europe starting to wonder about its own growth prospects and an extremely fragile mood on Wall Street combined for a dour, down day.
For several weeks, the chin-scratchers have looked for a "bottom." That elusive search has evolved into a Ahab-like hunt for "capitulation," for once that's located, the market can turn higher. Or so the sages say.
But capitulation, like a bottom, isn't presenting itself. Instead, the market is steadily bleeding lower. And despite all of the pessimism in the air, the sense is that many investors are still holding on, hoping for the market to turn.
Webster's Dictionary defines capitulation as " the act of surrendering or yielding." Phil Ruffat, senior vice president at Fuji Futures, says: "We have a different definition in Chicago: Throw in the towel."
Whatever it is, most market strategists haven't seen it. More troubling, some strategists think the search for capitulation is a fool's errand. Too deep into the bear's maw, they believe the market will take time to summon up the energy to move higher again. Instead of a single, violent downturn, the bull will have to piece itself back together in painfully slow steps.
For the crowd hunting the wicked downstroke to mark the end of the pain, what do they seek? Here's a short list, ranging from the most specific to the most anecdotal.
Heavy Volume Without fail, strategists said they'd be looking for a day of incredible volume, somewhere in the order of 3 billion shares traded on the Nasdaq Stock Market and 2 billion on the New York Stock Exchange. This is what happened on Sept. 1, 1998, when the market reversed dramatically after a massive selloff on Aug. 31, 1998, which came in response to growing fear about Long Term Capital Management and the Russian debt crisis.
On Sept. 1, the Dow ended up 330 points on what was a then-record 1.2 billion shares traded on the Big Board. That year, average daily volume was 673 million shares, so "capitulation" doubled the daily average. This year, according to the NYSE, average share volume is about 1.2 billion shares a day -- so one would be looking for volume in the order of 2 billion shares or more.
Duck-and-Cover Type Protection When portfolio managers don't want to own stocks anymore, that's a signal, and it can be witnessed in high cash levels in mutual funds, on the order of 8% to 9%, rather than the current 5% to 6%. Defensive moves in the futures markets are also an indicator. As TheStreet.com's Brian Louis wrote earlier, indications that people are taking major steps to protect themselves, such as massive buying in puts (options that bet on more pessimism) or an increase in the different options volatility indices, would indicate the type of panicked reactions that signify sellers are getting washed out. This happened in October 1987, when the Chicago Board Options Exchange Volatility Index, or the fear gauge, hit an all-time record.
Fear and Loathing This is more subjective, but talk of heavy margin calls (which isn't easily determined) or reports of redemptions from mutual funds for more than a period of a day or two are considered sentiment indicators that show growing fear. When people in the market, professionals and amateurs alike, are making drastic, panicked moves, that's considered a sign, however anecdotal. It can also encompass massive selling by institutions. "When a majority of professional advisors become bearish, that's kind of when you get it," said Richard Schmidt, editor and publisher of the Stellar Stock Report.
Reversal Days Sometimes the market opens with massive selling and then in the afternoon roars back on high volume. Oct. 7, 1998, in the midst of the Asian Crisis, was one of those days, when the Dow dropped nearly 200 points, rebounded to rise 150, and finished the day down just two points. From there, the Dow was off to the races through early last year.
Greenspan Is Useless The market might actually be getting there with respect to this. People now expect a massive 75 basis-point cut from the Fed next week, and nobody cares.
I Hereby Proclaim the Bottom! Even more sentimental, it ropes in all those anecdotes about splashy magazine covers heralding the end of stocks to the moment when people stop making jokes about bodies flying out of windows. Traders and analysts interviewed today believe the level of fear and panic that would signify a bottom in the market just isn't present yet, that there's still too much belief that the market will turn soon enough.
In this instance, "it's when people stop asking about tech," says Larry Rice, chief investment strategist at Josephthal. "It's when people get fed up with it, and when people don't want to read, 'Is it time to buy tech?' or, 'Have tech stocks bottomed?' "
If It Happens, You Won't Know, Anyway Some strategists were skeptical that a bear market would produce that all-out massive day of selling, the day when everybody collectively clears their throat and pukes out everything they don't want. A bear market capitulation is a process that can last months, some say, and investors won't know exactly when the bottom has occurred until after the fact.
"Bear markets don't change overnight because sellers get out of the way," says Gary Kaltbaum, technical market strategist at First Union Securities. "This is going to be a slow, arduous bottoming. You're going to have to bore people out of the market. The only thing that remedies this kind of market is one word -- time."
