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Tuesday, July 28, 2009

Capitulation

The US economy and the world is in deep trouble, and until root causes are fixed, the stock market is destined to go much, much lower. The problem is, "knowing" reality has nothing to do with the market direction. Banks being seized every weekend? Ha! Who cares! Goldman Sachs accused of manipulating the market! Hey, if they manipulate up, its all good. Earnings horrible? Well they could be worse! Unemployment crossing 10%? So what, that's been talked about for a year, its old news.

Point is, as an engineer type, I continually fall into the true reality vs market reality trap. And since this bear trap started, I have been probably doing a disservice to all the readers and myself, by letting knowledge get into the way of trading. When such soul searching en mass for "bulls or bears" occurs in trading, it is called "Capitulation". In the stock market, capitulation is associated with "giving up" any previous gains/losses in stocks as investors close positions in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp price changes. It usually is indicated by panic buying or selling.

So let's go over the capitulation that is going on right now shall we?

First we have myself and John Chinnock, both tortured on the positions on what to do next.
The Market Ticker, Karl has walked away from trading and blog updates, to return TBD.
Tim Knight of The Hope of Slope has reflected this past weekend, finding solace in an old prediction of SPX going to 1150, and has decided he was wrong to hold.
BullzAndBearz Blog has done soul searching, and is looking for SXP close above 985 "to confirm" a longer term rally is occurring.
Hussman Fund manager, John P. Hussman, defended the position of remaining defensive, in what seems to be a missed opportunity for the bull run.

Atilla at xtrends isn't capitulating as much as drawing a line in the sand, right here right now at SPX 980.

Capitulation usually marks a turning point in the market. The problem is, the overall shorting positions are down because of the market rally. People are too scared to short. The market won't go down for the heck of it, it needs more sellers than buyers. So the market could go to SPX 1150. I for one have decided to cut more % off of my positions if SPX closes above 986, why? Because Atilla and another blogger (click) make a good argument from a chart perspective, it is just too dangerous to keep full positions above that level.

Now is the time where the men stand the line, and know when to run for cover if being over-run. This week will be interesting to say the least.

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