Tuesday, July 11, 2006

Blog of the Week: The Big Picture

Capitulation? Hardly

For the past 2 days, Rev Shark at Real Money has been talking about the recent action as a Capitulation.

I have to disagree. Perhaps I have a different definition of Capitulation than does Rev Shark; While we both describe the recent market action as "lousy as all get out," I would hardly call it Capitulatory.

For a true Capitulation to occur, we need to see a "total surrender;" Interest in equity ownership will be replaced with disgust and loathing. I do not think we are there yet

I don't think of 1987 as a capitulation at all; stocks got ahead of themselves, and they saw a major correction. It was a short sharp drop that gave back 8 months of gains -- yet 1987 was still a positive year. Within a few days of the 23% drop, stocks started to climb again, and didn't let up until March 2000. The appetite for equities was hardly diminshed, and the correction was only temporary. Indeed, at the time, we were still in the first third of the 1982-2000 bull market.

True capitulation involves laying down of arms, an admission of defeat. That does not define 1987 to me.

Think back to the selling climax we saw June 13/14 -- I would say that was mildly capitulatory at best. After a solid month of selling, we saw some extreme readings. But that was as much as buyers strike than a true capitulation. I think of 9/21/01, the Friday after markets reopened post 9/11. Sellers sold until they were exhausted.

Maybe this is only a semantic disagreement, but that's not where we are now; Heck, as of last Thursday, markets were the highest they had been since...

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