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Was That Capitulation? at Trader’s Narrative

So was that capitulation? I don’t mean today’s gangbusters market. I mean yesterday’s rollercoaster ride.

Let’s see…

Stop, Hammer Time!
The intraday reversal gave us a beautiful, textbook hammer candlestick. Using the traditional Japanese candlestick theory, after a downtrend this is a portent of the end of selling pressure. Although the low could be tested - especially with Friday’s gap - a hammer is a bull’s friend.

Market Internals
The market was deeply oversold. The NYSE cumulative intraday TICK reached levels only seen right after September 11, 2001 and during the bear market bottom in the summer of 2002.

The New High Lows Index for Nasdaq reached 2.29%. Simply put, almost no highs, and almost all lows. To find a more extreme reading, we’d have to go back to the fall of 1998. Which as you know was a major market bottom.

Only 9.4% of the stocks in the S&P 500 index closed above their 50 day moving average. And only 34% above their 200 day moving average. The NYSE McClellan Summation index got as low as it has been since the bear market bottom.

My Kingdom For T-Bills
During Thursday’s nail biter of a session there was an exodus from anything risky towards the least risky asset. Theoretically risk free Treasury Bills. The run on government paper pushed the yield down to 3.86% for 3 month bills. To make things worse, due to an unexpected rise in tax receipts the government issued less paper. This sudden imbalance is extremely rare. And it only happens during panics (which… say it with me now… form bottoms).

I felt uncomfortable agreeing with Cramer, but I think this is one of the reasons why the Fed acted this morning. Commercial paper was being shunned. They stood up and basically told the market We got your back. For a bit it was touch and go, but my world feels right as rain again.

Margin Bulletin
I got a message from my broker warning me that positions in VIX futures and futures spreads could face an increase in margin from the CFE. I’m thankful for the headsup but I don’t trade these securities. I did notice that margin tweaking is a sign of inflection points. Just something to tuck under the hat.

Retail & Institutional Fund Flows
This is fascinating. According to the estimates from TrimTabs, we just had the highest weekly outflow since right after September 11, 2001. For about two years now the US mutual fund investor has been shunning the US stock market. But this week they pulled $12.8 billion out of US equity mutual funds.

According to TrimTabs, since the beginning of year, mutual fund buyers have been net sellers of stocks resulting in outflows of $35 billion in the last 4 months. The only time we saw similar outflows of this magnitude was during June 2002 and September 2002. You know what that was, right?

Strangely enough, bonds are the most popular asset class along with money market funds. They are even more loved than international markets. Bonds have seen an estimated $92 billion inflow since beginning of year this year.

That’s the retail side. What about the institutional mutual fund asset allocators? I’ll give you one guess.

They’ve been diving into the US market with the same intensity as the retail side has been escaping from it. So the smart money is buying and the emotional, dumb money is selling. Watch the video for more details:

Commitment of Traders
The most recent COT report dovetails with the fund flows data. We are seeing a continuation of the commercials going huge net long and the small speculator going the other way. Whether the futures market or the stock market, the two sides have clearly outlined their positions. There is no doubt where they stand.

What, Me Worry?
Which gives me a possible explanation for the sentiment picture. Perhaps the reason we are not seeing a total all out panic and despair from the retail investors during this downturn is that they simply don’t have any real vested interest in the outcome.

If we go by the COT and fund flows, they have very very few chips on the table. So why would they care? why would they get scared? Most of their money is squirreled away in cash equivalent and bonds and international markets. Unlike the 2000 top, they have very little invested in the US. Why would they even really care if the US market ticks up or down a few percentage points?

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17 Responses to “Was That Capitulation?”  

  1. 1 ken

    This feels like at least a short term bottom, since many other signals were as stretched as could be for a long time. The NYSE’s new lows yesterday was over 1000, not seen even during the last bear market. And BSC was a great tell, it was green almost all day, even when the SPX continued to go down. I was stalking it and when my system gave the signals, went aggressively long the brokers (BSC, GS) and some other stocks (AAPL, RIMM, ICE, MA, GOOG) that went on sale just before noon. But it was stomach-wrenching when it seemed that the bloodbath was not stopping until 1 pm.

    Cramer claimed that he worried about people losing their homes (really?), it’s likely he’s much more interested in saving his hedge fund friends. As with everything in the markets, timing is everything. The Fed was right in waiting 2 weeks for their facts and data to come in before making their decision, instead of listening to maniacs expressing their lunacy and rage on TV.

    Anyway, at least at this point, Bernanke tried not to follow exactly the Greenspan’s playbook by cutting the Fed funds’ rate, even though he may be forced to do so later.

    Rate cuts may start the whole excessive speculation cycle again, i.e, another bubble. Let the market flush out greedy bastards, who irresponsibly gambled (using excessive leverages) with naive investors’ money. These street thugs expect the Fed to bail them out every time they’re in trouble due to their rampant speculation without any regards for risks.

    If things get worse and worse, at one point the Fed may have to cut to save the economy. Sadly, others would suffer a lot more than the billionaire parasites in this situation — they always get away with their misdeeds. Fed rescue on not, the taxpayers paid the ultimate price. During good times, benefits and bonuses only go to Wall Street, but during bad times, everyone else has to share the burden.

    The Fed has always come to the rescue of these bloodsuckers, thus kept feeding the non-stop cycles of their irresponsible gambling and greed. Poor people already lost their homes, a bunch of lenders went belly up, but Wall Street’s rich thieves who “invented” all these AAA-rated mortgage securities/CDO’s got away once again.

    Nobody wants the financial system to collapse, and when the house is burning, the priority is to try to save it first, rather than questioning who started the fire. But it’s not fair if Wall Street crooks continued to light the fire and not getting any punishments afterwards, not only that, they continue to prosper.

    However, judicial rate-cutting should not be mistaken as being the same as the “Greenspan put”, which must be left resting in its own grave. If revived, it would signal to Wall Street scoundrels, once again, that despite their irresponsibility towards society and the economy, despite their selfish greed and financial recklessness, they’d always be bailed out by the Fed, at the expenses of the under-privileged classes.

  2. 2 Techfarm

    That was a beautiful capitulation day wasn’t it? Great looking hammer bottom.

    Now, is a re-test of the bottom almost a guarantee? What are your thoughts?

    If we do re-test, here’s a possible re-test scenario, and a bear and a bull case if we fail or succeeed on the re-test.

    What do you think? I think it’s 50-50 whether we pass or fail the re-test (if we do have a re-test!)

    I also find it interesting that we both look at the different oscillators and track things like $SPXA50R or $SPXA200R. Definitely extremely oversold at the bottom!

    During the lowest part, when there were only 7% of S&P 500 stocks above the 50 day moving average, I took a list at companies greater than $4 Billion dollars that were over the 50 day moving average. Interesting List.

  3. 3 Aaron

    I think this was probably a short-term bottom, but a re-test seems fairly likely. The information about the mutual fund flows is very interesting. Retail investors don’t get it regardless of how many times they are told it seems. They take money out of equities when they are down over 10% from their high, but then will put all their money in when the market is back at its high.

  4. 4 yourtradingstock

    Cramer’s power as the new guru is going to get some naive investors in hot water. That’s ok… He’ll carry their pain.

    There will be a retest of the recent low. Rate cuts couldn’t stop the stock market from bleeding during the Greenspan cuts of the early 2000’s. With news that’s probably worse than what caused the 1987 crash, it’s interesting that just a few weeks before Black Monday, the Dow Jones Industrials had it’s largest one day point gain at that time.

    Only a month ago, CNBC was proclaiming a runaway market. We’ll see if they proclaim this a bottom, and all is well. Quiet before the storm?

    When you have reports of bank runs, and accounts being frozen, it’s sure not time to load up and go on vacation.

  5. 5 Johan

    “What, Me Worry?
    Which gives me a possible explanation for the sentiment picture. Perhaps the reason we are not seeing a total all out panic and despair from the retail investors during this downturn is that they simply don’t have any real vested interest in the outcome.”

    I have thought about this same thing myself and I think you might be on to something. However, it would have been better the stupid money were long the market before so that we could read their panic better now. But as so many have stated, there are a lot of signs of total panic in the market. Maybe the best ones being the extreme rush to buy volatility and t-bills.

    I believe in a re-test soon, and then later at least another re-test. But from a contrarian view I don’t like that everyone here seems to think the same thing ;)


  6. 6 Johan

    From the video clip: “I believe that hedge funds buy ETSs instead of futures”

    I would love to hear their reasoning behind that statement!

  7. 7 Markus

    Stupid money, hm. The “retail investor” participates only for 3-6 % in nowadays stock markets. I think his/her behavior has become a less useful gauge over the time. I appreciate sentiment quite a lot, but you have to read it always in context. Now, there is so much reading and hearing about bottoming in the equity markets.. It makes me cautious. And we have indeed a long time of liquidity excess which will reverse.

  8. 8 Babak

    Johan, we never really get all the ducks lining up the way we want them to. re ETFs, looking at the sheer volume, it is easy to see that big players are involved.

    Markus, where did you get the 3-6%? When retail investors are fleeing the market in record numbers, that is a huge tell.

  9. 9 President Fox

    Nice post Babak.
    Regarding Markus’ comments, he might have been referring to the data in the following link (gives breakdown of retail v program trading last Thursday).

  1. 1 » Blog Archive » Carnival of The Entrepreneur - August 20, 2007
  2. 2 Bond Market Screaming For Rate Cut - Fed Listening?
  3. 3 Stock Market Volume: Summer Doldrums Or Summer Mayhem?
  4. 4 Sentiment Overview For Week Of August 31st 2007
  5. 5 Major Market Players Taking Opposite Sides
  6. 6 FOMC Rate Cut September 18th 2007
  7. 7 Sell Something: Dow High Relative To Moving Average
  8. 8 Back To Blogging!

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