Sunday, October 12, 2008

Is This What Capitulation Feels Like?

Everyone seems to be looking for it. Panic is in the air. Was that it? No? How about that? Will it be the volume that tells us it's here? What about some trusty technical indicator? Will there be some sort of extraneous event that marks it? Is it going to come this afternoon or tomorrow? Or maybe it came yesterday and we'll only know for sure tomorrow? Do you agree with that, Bob? You agree right? Well, don't you? Man, if it doesn't come soon, this could start to get really crazy!

It's the capitulation game. Whoever finds it first wins. Unfortunately, nobody seems to know what 'it' is or where it can be found. So instead of looking aimlessly, most have just resolved to screaming at the top of their lungs, "I GOT IT" and hoping others believe them. The search for The Holy Grail comes to mind.

Meanwhile on planet earth, far removed from this Orwellian nightmare, people seem to be slowly coming to terms with the fact that what most are looking for is only a longing for something that used to exist - steadily rising asset prices.

I've heard it all this week. But the story usually goes like this: Some indicator used by some reputable person in the business is at 'historic' oversold levels. For as long as we have data on the markets, nothing like this has ever happened before. Therefore, it shouldn't be happening and most certainly cannot continue to happen.

That is about the extent of the logic people use to proclaim that markets should go up again. Will it? Probably. The odds are certainly in their favour. Nothing goes in one direction without pullbacks. And when prices do start to move higher for a few days, prepare to hear that the bottom has been reached and we've found capitulation.

But what is capitulation in the markets? Really, it is the universal belief that prices can only go in one direction. So if everybody is looking for capitulation, is it actually possible to find it? In my opinion, no. Capitulation can only be found, by definition, when people stop looking for it.

To think of it another way, the market has been trying to tell us something for about a year now. In the last two weeks it's been screaming in our ears. It's been trying to tell us that our financial system, based on fractional reserve lending and compounding debt structures, needs to come to an end and something needs to replace it. Every day that the market has moved lower, more people come to understand the problem and stop looking for a bottom. Eventually, enough people hold this view that there are no longer enough people to convert. Meanwhile, the market is starting to tell us something else and the market slowly starts to move higher. Then it starts to scream in our ears about this something else. But it never starts with screaming and people buying in a panic out of fear of 'missing something.'

That is something called a "dead cat bounce." Or what the media commonly refers to as "a bottom." When the real bottom comes, I can almost guarantee the media will miss it completely.

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