Capitulation Watch: Market Analysis

[TWiley]

As you know, “capitulation” is a term that refers to the final phase of the market cycle. It is when a large amount of on-the-fence investors get scared out of equities and go to cash. This forces the price to bottom, the P/E ratios to look real good, and with the majority of potential sellers on the sidelines, a new bull market (or major bear market rally) can begin.

This article is called “Capitulation Watch”. I hope you find it interesting.

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Might this bear market nevertheless bottom out without capitulation taking place? To gain insight into this question, I analyzed all bear market bottoms since 1965, using the definition used by Ned Davis Research, the institutional research firm.

I then analyzed the behavior of four different sentiment measures on the occasion of those bottoms (if data were available): In addition to the HSNSI, I focused on (1) the well-known survey of newsletter sentiment conducted by Investors Intelligence, (2) the survey of individual investors conducted by the American Association of Individual Investors, and (3) the CBOE's Volatility Index (.VIX) which reflects expectations of future volatility among options traders, and which is often referred to as an "investor fear gauge."

Incredibly, I found that, on average across these past bear markets, sentiment hit its lowest point 15 calendar days prior to the actual day of the bottom. That's impressive -- very few other market-timing indicators come this close.

Though this 15 days is an average, the actual range is not that big. The greatest number of days separating any of those prior bear market bottoms and the low point of any of the four sentiment measures was just 112 days.

What light do these historical precedents shed on the current sentiment situation? Consider:

- As of Monday, it has been 243 days since the HSNSI hit its low for this cycle, more than double what previously was the biggest discrepancy between the date of the market's low and of sentiment's low.
- The picture is only marginally better when we look at the Investors Intelligence sentiment measure: It has been 132 calendar days since it hit its low for this cycle, less than in the case of the HSNSI, but still greater than the biggest discrepancy at prior bear-market bottoms.
- The .VIX's behavior, in contrast, does fall within the confines of historical precedent, though barely. It has been 102 days since it hit its peak.
- Finally, the AAII sentiment index: It is the only one that comes anywhere close to supporting the notion that we're experiencing capitulation right now. It reached its low point for the cycle so far on Feb. 19, less than two weeks ago.

The bottom line, given all this? It's theoretically possible, but I believe nevertheless difficult, to conclude from the sentiment data that the bear market is close to bottoming.

How much further must the market decline before contrarian analysis leads to a more cheerful conclusion? There is no way to know, since it depends on how advisers and investors react.

It could be that a couple of more days like Monday will be enough to cause them, finally, to really and truly throw in the towel. Or, instead, it might take weeks and months of punishing downside action before capitulation occurs.

We hopefully will know soon enough.

Full Article Here: https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/capitulation-watch&topic=investing-stocks

[notesdev]

1. The market bottom

will come AFTER people are tired of being wrong over and over and over trying to pick the bottom, and exhaustion sets in. Then, once the faith in the fraudulent structures that compose our capital markets is gone for good, we will be able to rebuild on the foundation of whatever real wealth and productive capacity remains.