The Dow Jones Industrial Average won’t find a secure base until it sheds another 1,000 points, which it could do before March, but that will signal the capitulation is over, Alpesh Patel, principal from Praefinium Group, told CNBC.
“We think the Dow’s going to hit probably about 7,000 and that means it’s going to go below its lows that it hit last year – that’ll be the capitulation, that’ll be when we get some indication of things having cleared out,” Patel said.
The sharp falls could happen in either February or March he added. When stocks get to those levels investors will be lured back in by the attractive valuations, he predicted.
Investors looking for a clear signal that stock selling has been exhausted should watch the stock price of Microsoft, Patel said.
“Wait for Microsoft to move from its current $17 (per share) to around $21/$22. That will give you some indication that the market is starting to recuperate again,” he said.
Companies like Microsoft are a good barometer for the rest of the market because they are cash rich and don’t have the “clouds of survivability” that are hanging over other companies, he said.
Even though Patel thinks capitulation is due to take stocks higher soon, he points to the 'January Effect,' which suggests that the overall year will be negative for stocks. The 'January Effect’ theory says that if the first month of the year is lower, which was the case for the major indexes this year, the markets will fall for the rest of the year.
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