Sam Collins

Does Capitulation Mean a Bottom?

by Sam Collins   10/09/08

Despite a massive, coordinated, worldwide effort by the central banks to stem the growing financial crisis, stocks ended Wednesday with losses.

Before the session started, the Fed announced a U.S. rate cut of 50 basis-points in the Federal funds rate taking it to 1.50%. The Dow Industrials (DJI) did open higher but by 10 a.m. Eastern, the market had hit its high of the day at 9,628. By midday, it fell to its low at 9,194.

Like many recent days, it again was a very volatile session as news controlled the tape, taking stocks from the low at noon to the high again at just after 2 p.m. Eastern and back down to the close at 9,258.

Bank of America (BAC) had a successful common-stock offering of $10 billion. But in order to get it done, the company priced it at a 7.5% discount to the market, and the stock fell by more than that amount closing at $21.97, down $1.80. On Tuesday, the stock had fallen more than 25% following disappointing Q3 results and a 50% cut in its dividend.

Alcoa (AA), traditionally the first of the Dow stocks to report earnings, reported a disappointing 33 cents a share rather than an expected 54 cents, and one securities firm slashed its 2008 earnings target to $1.96 from $3 and its price target to $12 from $26. AA closed at $14.71, down 12%.

But Monsanto (MON) had a surprise for investors by reporting 39 cents a share versus an expected 11 cents, and the stock closed higher by almost 10%.

At the close, the Dow Jones Industrial Average (DJI) was down 189 points to 9,258, the S&P 500 (SPX) lost 11 points, closing at 985 and the Nasdaq (NASD) closed at 1,740, off 15 points.

The New York Stock Exchange traded more than 2.1 billion shares and the Nasdaq did almost 1.7 billion. Breadth on both exchanges was a negative 3-to-1.

Crude oil (November contract) continued its decline -- falling $1.11 to $88.95 a barrel -- and the Amex Energy SPDR (XLE) rose 98 cents to $52.86.

As investors continued a flight to safety, some put their stock proceeds into gold again. The December contract closed at $905.50, up $24.50, and the PHLX Gold/Silver Index (XAU) rose $17.84 to $121.47.

What the Markets Are Saying

The S&P 500 (SPX) is now down more than 36% from its October 2007 high and down more than 17% in just the past two weeks. The sell-off now ranks as the worst since the crash of '87.

Freefalls like this are the result of capitulation, an overused word that means investors have advanced beyond the panic phase and are willing to sell at any price just to get out of the market and "stop the bleeding." Many conclude that they can never make back what they lost and some vow to never buy stocks again.

Most importantly, "market capitulation" occurs when almost all investors sell out of every sector and group. They rush to safer investments such as treasury bonds, CDs, money-market funds, gold, or just stuff cash under the mattress.

This selling usually occurs over a very brief span of time -- a period much shorter than the time it took to make the gains -- but, in fact, the final market low turns out to be higher than the prior bear market low and eventually leads to even higher prices. At, or shortly after, the final sell-off, savvy investors -- sensing the bargains -- rush in with very heavy volume and quickly drive prices higher, changing the trend as the markets enter a new bull market.

Recently, there were two periods of capitulation that investors who have been in the market for more than 20 years will recognize: the sudden correction in October 1987 and the sharp sell-off of July 2002 followed by that of October 2002 -- the Sept. 11-induced sell-off that marked the bottom of the last bear market.

Are we in final capitulation bottom now? I believe that we are in a final capitulation sell-off, but are we at a bottom?

Just like chocolate I can't fully describe the bottom but I can tell you about some of its characteristics. I don't believe that we are there yet but we are getting close and when we reach it, most people who have been in the markets for three decades or more will more than likely know.

Stay tuned -- when it comes we'll whisper it softly.

Today's Trading Landscape

Earnings to be reported today include: Bassett Furniture Industries (BSET), CardioDynamics Internationl (CDIC), Chevron (CVX), International Speedway (ISCA), Intraware (ITRA), Material Sciences (MSC), Robbins & Myers (RBN), Rocky Mountain Chocolate Factory (RMCF), RPM International (RPM), Saba Software (SABA), Tortoise Capital Resources Corp (TTO) and TeleCommunication Systems Inc (TSYS).

Economic reports due today: initial jobless claims for the week of Oct. 4 (the consensus expects a loss of 22,000), August Wholesale Trade and the DJ-BTMU Business Barometer for Sept. 27.

Iceland's Financial Supervisory Authority took control of the country's largest bank. Stock futures are higher this morning because the short selling of financials is allowed again. National City Corp. (NCC) said that it is in talks to sell.

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