Monday, March 2, 2009

The bottom of the market? (stock)

As we close today right at the 700 level in the S&P 500 and below 6800 on the Dow, it's getting to that time when people have been asking me whether the market is reaching a bottom. Even though we've continued to fall a lot in the recent weeks, whenever I ask other traders, most of them tell me that they've yet to sense capitulation in this market.

Capitulation is a sell-off categorized by extremely high volume and a sharp fall in prices. It represents when many market players just give up. Whatever the reason for giving up (technical levels, margin calls, etc.), many tend to view that right after capitulation is the best opportunity for a turnaround. For the shorts, capitulation triggers either the catalyst they've been waiting for or skews their risk/reward such that it makes sense for them to begin covering. For the people who have been waiting patiently to get into the market, the point when everyone else gives up is the best opportunity, as those who have a reason to sell have just sold and less downward pressure will follow.

In the last 7 trading days, the S&P 500 has fallen 10% (775 to 700) with average daily volumes about 40% higher than the average daily volume previously in 2009. This sharp fall and increase in volume might be signs that the capitulation we've been waiting for is already occurring or will happen very soon.

My guess as to a big part of why we've gone down methodically and without capitulation is that it's the government's (or whoever's in charge) fault. The S&P 500, which many perceive to be a bellwether for the American economy, is being weighed down by having a large chunk of financials in the index. As the government continues to refuse to nationalize certain banks, and continues to throw money into the abyss created by these financials, the stocks continue to have slow downward pressure on them and drag the whole market down. If they nationalize these banks or AIG, we can remove them from the index, and have a cleaner perspective on the American economy instead of continuing to track these anchors that pretty much are failed businesses at this point.

We have CNBC on during the day in the office even though we don't really pay attention much. I thought I heard Kudlow saying that because the government continues to throw taxpayer money at these institutions in exchange for equity, Americans are just going to end up owning a lot of penny stocks (Citigroup was at a low of $1.15 today).

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