Australian (ASX) Stock Market Forum

Capitulation

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Buyers were buying, sellers were selling and the market dropped almost 300 points or 7%. Big hit for one day and you might normally expect a rebound of 50 - 120 pts however we will follow the US lead overnight and it could go either way. hopefully everyone is off copulating rather than capitulating and the market will steady rather than continue to fall in panic. :)
 
By its very nature if we had reached the capitulation stage then the question wouldn't be being asked.

So no, we're not there yet in my opinion.:2twocents
 
the markets in general are holding their breath waiting to see if a rumoured co-ordinated cut is on the cards.... I tink that if it isn't then a co-ordinated capitulatory type mass jump may be the result... have topped up my IVC holdings in anticipation... :dead:

Cheers
..........Kauri
 
Anatomy of a bottom

Commentary: Psychological characteristics of capitulation are largely absent

By Mark Hulbert, MarketWatch

Panic is not the same as capitulation.

That in a nutshell captures much of the confusion over what happened in the stock market earlier this month.

Without a doubt there was panic. But capitulation is something different, as I have learned in recent weeks as I have read more and more about the subject.

Capitulation has a number of distinguishing psychological characteristics, such as investor disgust and exhaustion. Having been burned by the market for so long, investors capitulate by resolving never, ever, to trust the market again.

In the wake of capitulation, therefore, interest in the market declines.

Apathy rules.

To be sure, this definition cannot be mechanically measured. It is hard to pinpoint when investors become maximally dejected and apathetic. But my hunch is that we have yet to experience capitulation.

For example, interest in the market is now at an all-time high. Individuals who I never knew were even aware of the stock market, much less that I write a column on investment strategies, are stopping me in the street to ask what's going on.

One illustration of capitulation that I find particularly instructive, even though it is from a pre-Internet era: During bull markets, as well as during bear markets up until capitulation finally occurs, investors turn to the business sections of their morning newspapers to see how much they made or lost the previous day. At times of capitulation, in contrast, investors don't even bother to open the business section at all.

From the perspective of this illustration as well, capitulation is yet to occur: Far from being ignored, business news is now splashed all over the front pages of newspapers' lead sections.

Yet another perspective, this one more quantitative, is provided by a recent study by Ned Davis Research, the institutional research firm. They looked at all panics since 1929, searching for distinct patterns in what occurred immediately in their wakes. Panics were defined as declines in excess of 20% in a short period of time, and of course this last month most definitely qualified. Ten panics prior to the past month made the grade.
The firm found that in, seven out of these 10 cases, the panic low did not mark the final low of the bear market.

This was certainly the case during 2000-2002 bear market, for example. The panic low that occurred near the end of that decline came on July 23, 2002, according to Ned Davis Research, when the Dow closed at 7,702. The final bear market low didn't come until two and one-half months later, on Oct. 9, when the Dow closed at 7,286.

Of course, a sample of just 10 isn't big enough to draw particularly confident conclusions. Nonetheless, based on this sample, odds would appear good that the final low is yet ahead of us.

My guess is that, when that low does finally occur, we'll see be witnessing, and experiencing ourselves, a lot more of the psychological traits associated with capitulation: Exhaustion, disgust, lack of interest, even apathy.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980

http://www.marketwatch.com/news/sto...1F-7F54-42BF-AE82-370A2D0827F1}&dist=hplatest
 
Psychology suggests we haven't hit bottom yet
Many experts in human behavior believe markets behave like minds. The reversal we crave remains elusive, theory holds, partly because we crave it so strongly.
By Brett Steenbarger and Jon D. Markman


A highway patrol officer with a radar gun is beaming it at speeders. He notices a vehicle traveling 45 mph in a 30 mph zone. As it passes the officer, the car accelerates to 50, 60, then 70 mph. The officer lets out a sigh of relief, noting to his partner, "Well, we don't have to worry. He's going so fast, he'll have to slow down eventually!"

A psychologist meets with a client who is in depression. For weeks, she has not eaten well or slept soundly, and she has begun thinking regularly of suicide. "That's good news," the psychologist responds. "You're feeling so bad, you've got to be improving shortly!"

For the second time in a row, the stock market declines more than 3% in a single session, with the number of issues making new 52-week lows swamping the number making annual highs. Volume and volatility have picked up on the decline. A well-known market analyst concludes, "We're seeing a capitulation. This is a great time to buy!"

In all three examples, people are making inferences about a reversal of trend based upon its increasing trajectory. The first two situations seem absurd, but the third is a staple of recent market commentary. It's also a major reason why investors have held onto positions through the recent decline, reluctant to sell when they feel a bottom might be at hand.

Yet the third scenario is every bit as absurd as the first two. To explain why, let's explore the psychology of reversals and see how change occurs in minds and markets. This analysis may help investors frame their market strategies in the light of last Wednesday's dramatic broad-market reversal and the hopes that it fostered.

Reversals and emotional change
In the practice of psychotherapy, professionals spend much of their time working to halt the inertia of human behavioral patterns. A classic example is insomnia. Once a person finds that she cannot sleep, she begins to worry about sleeping and tries a variety of actions to make herself sleep. Of course, it is difficult to feel naturally drowsy when one is trying with all one's might to induce rest, so the very efforts at coping help to maintain wakefulness. Ironically, the best treatment for this kind of insomnia is to convince the person to cease all efforts at making sleep happen.

Much personal change has this ironic quality, according to a raft of research by cognitive psychologist Daniel Wegner, formerly of the University of Virginia and now at Harvard University. Too often when we try to control an action, as in attempting not to think about an unpleasant person or event, the results backfire: an "ironic process" leads us to focus even more upon them. People change, he observes, by reversing their coping efforts and thwarting this ironic process.

British psychologist Michael Apter has proposed a "reversal theory of motivation" that helps make sense of this irony. A dramatic example of Apter's reversals can be found in the research of University of Texas psychologist James Pennebaker. He found that people who make efforts to avoid expressing painful emotions wind up experiencing more of those emotions, taking a toll on their mental and physical health. However, individuals who write about their suppressed emotional pain in journals find relief from their experiences and then enjoy greater health. Once again, cure is found by radically reversing people's coping efforts.

Market behavior and agents of reversal
Markets operate on the same principle of psychological reversal as people. Think of it as Newton's First Law of Kinetics applied to minds and markets: An object in motion tends to stay in motion with the same speed and in the same direction unless acted upon by an unbalanced force. It is the unbalanced force of the therapist, nudging the person toward his opposite pole, that creates reversals of mood and behavior.

So what provides the unbalanced force in markets?

Here we turn to Edgar Peters for an answer. Peters is author of "Fractal Market Analysis" and chief of asset allocation at PanAgora Asset Management in Boston. He notes that some market participants trade on a minute-to-minute basis. Others specialize in holding positions for days, weeks, months, or years. What holds the market together, Peters explains, is that low-probability events at a short time frame -- extreme rises or declines -- are normal events at longer time frames. When steep short-term advances or plunges occur, relative values for selling or buying are created for participants at longer time frames, who then enter the marketplace. They provide the unbalanced force that reverses the short-term trend.

In a very real sense, traders and investors at longer time frames are therapists for the market. By entering the markets in force when prices become attractively high or low, they become agents of reversal.

One important Newtonian implication of this line of reasoning is that trends will stay in place until price extremes are reached that convince the longer-time-frame participants to enter the fray. Markets, it would appear, are prey to the same ironic process as people. While traders and investors are actively seeking tops and bottoms, markets inexorably continue their rises or declines. Only the reversing effects of the longer-time-frame participants can nudge a market trend to its opposite pole.

Market history: catalysts for reversals
Let's get some historical perspective. A February 2002 study by Paul F. Desmond, editor of the investment-analysis journal Lowry's Reports, supports this notion of market reversals. Going back to 1938, Desmond investigated all instances of significant market declines. He studied the distribution of volume among rising and declining stocks each day and the distribution of total point changes among rising and declining stocks.

Desmond found that major market declines were typically accompanied by a series of days in which 90% of volume was concentrated in falling stocks and 90% of price changes were concentrated in declining issues. This suggested to him that panic and indiscriminate selling was a hallmark of the latter stages of market declines.

He also found, however, that declines did not terminate until there was at least one day in which 90% of volume was concentrated in rising stocks and 90% of price changes were concentrated in rising issues. This, to use our phrase, was the unbalanced force that created the reversal. Vicious downtrends tended to remain in place until such bargain conditions were created that buyers (presumably from longer time frames) piled into stocks.

Could the market lows have been predicted in advance? No, although they can be identified quickly once the strong up-thrust days have occurred. Market bottoms do not exist independent of subsequent market action. It is the mass buying noted by Desmond that creates bottom points in the markets.

"Days of panic selling cannot, by themselves, produce a market reversal," Desmond notes, "any more than simply lowering the sale price on a house will suddenly produce an enthusiastic buyer. … It takes strong demand, not just a reduction in supply, to cause prices to rise substantially."

What will it take to break this market downdraft?
Desmond notes that the September 2001 decline did not produce a single day in which 90% of volume and price changes were concentrated in falling stocks. Similarly, during the rise that followed the September lows, there were no strong demand days in which 90% of volume and price change were concentrated in rising issues. This led Lowry's Reports to conclude that the market had not seen the ultimate market bottom, despite the severity of the September drop. In retrospect, their call was correct.

In the recent market, the closest the New York Stock Exchange came to a day with 90% of volume concentrated in declining stocks was July 2, when the figure was in the high 80s. The sharp rise on July 5 saw 90% of volume concentrated in rising issues, but then the meltdown accelerated without a single 90% day in either direction. Most notably thereafter, the sharp rise on July 24 did not meet the criteria of vigorous buying despite the magnitude of the price changes achieved.

So here is the painful forecast from Desmond: The market's eventual fall may not be broken until we have seen a series of down days with 90% negative volume and price -- enough of a decline to bring the longer-term bargain hunters out in force.

"Look at the extent of the decline we have had," Desmond said in an interview from his office in Florida, "and we haven't even had the panic stage yet! … We had the long bull market where investors were trained like Pavlov's dogs to buy every dip and it takes a long time for people to unlearn those lessons." Indeed, Desmond notes, this may explain why major bear markets tend to occur once in each generation.

If Wegner, Apter, Pennebaker, Newton and Desmond are correct, only titanic reversals create lasting change. Prices have retreated significantly from their highs, but not yet so significantly that buyers are stampeding to pick up the bargains. Wednesday's rally may have been mildly therapeutic for traders and investors, but it was not the extreme therapy that Desmond -- and market bulls -- demand before declaring that the market is on the road to recovery


Something From about 2002.

motorway
 
motorway said:
Here we turn to Edgar Peters for an answer. Peters is author of "Fractal Market Analysis" and chief of asset allocation at PanAgora Asset Management in Boston. He notes that some market participants trade on a minute-to-minute basis. Others specialize in holding positions for days, weeks, months, or years. What holds the market together, Peters explains, is that low-probability events at a short time frame -- extreme rises or declines -- are normal events at longer time frames. When steep short-term advances or plunges occur, relative values for selling or buying are created for participants at longer time frames, who then enter the marketplace. They provide the unbalanced force that reverses the short-term trend.

In a very real sense, traders and investors at longer time frames are therapists for the market. By entering the markets in force when prices become attractively high or low, they become agents of reversal.
Click to expand...


Nice articles and the above pericope is really a very good academic discussion.
 
The doomsayers on HC DJIA thread feel that tonight could be the night...

I'll be under the bed if anyone needs me.
 
great post from Motorway,

In my personal experience, this new freefall is partly or even mainly due to the "govt guarantee"

Is causing many, many redemptions in all Managed funds.

I personally have been selling down since December, but last month redeemed the remainder of my MINs, as I anticipated several problems including price falls, but especially liquidity.

I am a retiree, and partly used a WRAP product for convenience.

I joined ASF to improve my knowledge, even thoough I have been investing in shares and property for a long time.

I got very peeved hearing the advice of EVERY FP and Broker i talked to saying "hold on" (not just to me but many other people).

So i formed my own SMSF, pay $600pa flat fee, and save over $10,000pa on fees!! from the Wrap platform.

This is fairly confronting and time consuming.

I just got SO sick of everytime I sold down, being advised unneccesary.

As many retirees are conservative, and cannot rebuild their portfolio, the affect of what has happened with gaurentee deposits and frozen redemptions, I predict mass panic causing scared retirees to dump all Mins, including share funds, not just mortgage funds ( they cant dump them now).

As these managed share funds have massive portfolios, i predict we will see some savage selling pressure.

the govt will need to address this urgently

I predict we will not see a rally until profits (reflected in dividends), strongly and consistently outweigh returns from cash...(similar to around 2003).
 
https://www.mta.org/eweb/docs/2002DowAwardb.pdf


He also found, however, that declines did not terminate until there was at least one day in which 90% of volume was concentrated in rising stocks and 90% of price changes were concentrated in rising issues. This, to use our phrase, was the unbalanced force that created the reversal. Vicious downtrends tended to remain in place until such bargain conditions were created that buyers (presumably from longer time frames) piled into stocks.

Could the market lows have been predicted in advance? No, although they can be identified quickly once the strong up-thrust days have occurred. Market bottoms do not exist independent of subsequent market action. It is the mass buying noted by Desmond that creates bottom points in the markets.

"Days of panic selling cannot, by themselves, produce a market reversal," Desmond notes, "any more than simply lowering the sale price on a house will suddenly produce an enthusiastic buyer. … It takes strong demand, not just a reduction in supply, to cause prices to rise substantially."
Click to expand...



Believe it or not, in the past month, the market has given us 8 90/90 extreme days (either up or down). Lowry’s calls it “the greatest rash of extreme volatility in at least sixty years.”

Their conclusion is a bit more sanguine:

“With the evidence currently available from our measures of Supply and Demand, the probabilities favor a limited recovery rally. The 74 year history of the Lowry Analysis shows that such rallies are usually best used to sell into strength and build defensive positions. However, it is important to recognize that exceptions to the probabilities are always possible.”

http://www.tradersnarrative.com/more-on-lowrys-90-90-signal-1248.html

DYOR :)

motorway
 
motorway said:
https://www.mta.org/eweb/docs/2002DowAwardb.pdf

Believe it or not, in the past month, the market has given us 8 90/90 extreme days (either up or down). Lowry’s calls it “the greatest rash of extreme volatility in at least sixty years.”
Click to expand...

The date on that article is a year old. It is not discussing recent market.

But a good guide for capitulation nevertheless.

Thanks for pointing me to P/F thread. I have an active interest in fractal traffic (Internet traffic). I think group human behavior, in stock market or Internet traffic, gives rise to fractals. Really interesting.
 
The 100 pt chart has to make a 3 box reversal

and then ?

Richard Wyckoff on the bottom of the 1907 panic

Rockefeller ordered a private telegraph wire run into his house, and began socking away bundles of securities in one of the downtown vaults. The Morgans were also now on the buy side, and quietly telling their friends to get aboard again. We tried to interest some of our public clients. They would have none of it. The market was now being manipulated to keep the public fearful and out of it, until the bankers’ portfolios could be loaded up again at the low prices. So when the market moved up too much off the bottom, as the bankers bought, and some of the public ventured in, the advance was promptly knocked on the head by manipulative selling.

The result was a narrow whipsawing market in which traders, long or short, could not make any money, but the accumulators could continue to accumulate. It’s a well known principle of manipulation that more people can be tired out and made disgusted with their holdings, thus induced to sell at the low prices, by the whipsawing at the bottom that grinds them down until they give up.
Click to expand...

A market of opportunity will have a fractal depth

Winners of on one scale will be buying off Winners of another scale

with short selling and fractal depth a market can be a win win market

Without fractal depth

We have a wide or narrow market on all scales

wide and narrow markets facilitate
distribution and accumulation
respectively..

more people can be tired out and made disgusted with their holdings, thus induced to sell at the low prices, by the whipsawing at the bottom


Discussion only
motorway
 
This Richard Wyckoff read is very interesting how in the paper & telegraph days the system was played with.

Rockefeller ordered a private telegraph wire run into his house, and began socking away bundles of securities in one of the downtown vaults. The Morgans were also now on the buy side, and quietly telling their friends to get aboard again. We tried to interest some of our public clients. They would have none of it. The market was now being manipulated to keep the public fearful and out of it, until the bankers’ portfolios could be loaded up again at the low prices. So when the market moved up too much off the bottom, as the bankers bought, and some of the public ventured in, the advance was promptly knocked on the head by manipulative selling.

The result was a narrow whipsawing market in which traders, long or short, could not make any money, but the accumulators could continue to accumulate. It’s a well known principle of manipulation that more people can be tired out and made disgusted with their holdings, thus induced to sell at the low prices, by the whipsawing at the bottom that grinds them down until they give up.
Click to expand...

Mind you if one can handle the DOW volatility and 100 + point swings :rolleyes: then it could be fun.Not for me though, them whipsaws are nasty things.:mad:
 
I am curious about some aspects of ascertaining that capitulation is taking place.

Specifically links between price and volume.

If you look at price alone, you would have to say we are in capitulation phase on ASX.

However, daily and monthly volume has not increased on ASX.

I notice higher volumes on DOW.

I have a VERY bad feeling about the direction of the ASX.

I have been selling down my portfolio proportionally on a monthly basis for 11 months.

until I dispensed with my broker and fin advisor, they were still telling myself (on every single occasion), and others not to sell.

this suggests to me anectdotally, that there must still be huge volumes of equity holdings in super, unsold.

it beggars the question, what might happen if they do sell.

Im not sure what proportion of share equity is held by Super funds, but I think it would be a very sizeable proportion.

Would be most interested to know roughly what % ?

Most people I talk to are still unbelievably blase or ignorant about what is occuring. I am still getting told it is a "paper loss" only.

I dont want to upset them, but "mark to market" is the more appropriate method, in these times. IMO

The Nikkei Index is well below its 1989 level, to the best of my knowledge.. so much for a "paper loss"

At some point in time, if capitulation does become widespread, as I believe is about to occur, due to media coverage making people aware enough to really check what has happened to their super balance, then panic will set in, and most people will ignore their FP advice and just tell them to sell

I know Stock Market is a leading indicator, but I see absolutely no catalyst whatsoever for bounce.

As a "for instance" GM and Ford are comatose companies, in their current form.

Their imminent demise, will be a big blow for the DOW, and the ASX would undoubtedly follow.
 
awg said:
...
I notice higher volumes on DOW.
Click to expand...

it's clear that AU will follow the US.... if capitulation has happened (price and volume) on the DOW... then once can say that a recovery on the DOW is the more likely occurance.... effectively, there's no need for a capitulation on the AU markets as we'll blindly follow the US price action - and not neccessarily the volumes...

the question is... does the AU market really need a texbook capitulation to market a/the bottom?
 
awg,

Interesting thoughts there on the dow "volumes" at this stage the ASX is just following the dow (as usual)

I will now watch also very closely the volumes on the ASX for increases.

Paper loses are acceptable because one expects a bounce back up as it always does. Its the time inbetween when reality sets in. It will not be nice if a prolonged period before markets bounce.

On another note I am keeping a very close eye on Australian Job Loses, unemployment.

Korrupt 1, just read your post. Volume may not be needed on ASX. If continuation of normal volumes then that might reflect "a bounce" is on its way.
 
For an interesting over view ( for discussion dyor :) )

http://www.lwcm.com/objects/PDF Files/InterimMemo#9 101008.pdf



I think this is now a stupid and irrational time to be reducing equity exposure. If you feel compelled to reduce
equity exposure risk do it on a rally, up at least 25% from current levels.
The stock market in my view is in an outstanding buying zone, both for the intermediate term trader and the
long term investor. Long term investors should currently have 60% of personal maximum equity exposure invested
right now, increasing it to 85% by the end of October.

Steve Leuthold

Selling on the part of individuals has now
reached climactic levels akin to past market lows.
Click to expand...



more recent views

http://normxxx.blogspot.com/2008/11/interview-steve-leuthold.html

http://www.cnbc.com/id/28254643/

motorway
 

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