Capitulation? Market Looks For Signs Selloff is Done
Amid a two-week market selloff came the first whiffs of capitulation Friday, that throw-in-the-towel moment when stocks can find a bottoming point.
Whether it was the first 500-point Dow plunge in three years Thursdayor the biggest rush of money out of money market funds since the collapse of Lehman Brothers, some strategists were beginning to see the signs that investors were panicking and selling was reaching its apex.
While "capitulation" sounds ominous, it actually would represent the beginning of a turning point that whether near-term or long-term represents a turning point for the battered market.
"We saw it (Thursday) in the last hour," said Peter Boockvar, equity strategist at Miller Tabak in New York. "The market by one measure is more oversold than we were at the October 2008 low and the March 2009 low. That doesn't mean we can't keep going down. I think we're really close."
The market received a mid-session reprieve Friday shortly before noon and swung violently higher on news that more help might be on the way for the eurozone peripheral nations, in particular Italy.
While the future of the heavily indebted nations remains in doubt, news that Italy was taking measures towards fiscal stability, such as the institution of a balanced budget amendment, was enough to give US investors cause for cheer.
The timing was especially fortuitous considering the market had extended the previous day's punishing drop with another nearly 200-point slide in morning trading.
"In the bigger picture I don't think this market is done going down for good," said Rick Bensignor, chief market strategist at Dahlman Rose in New York.
Yet the signs appeared powerful that investors have been selling positions aggressively enough to generate the kind of mild relief rally the market experienced Friday, with the Dow industrials gaining about a half a percent on the day. Trading was brutal, though, with the bluechip index swinging more than 400 points during the session.
Money market funds over the past week have seen $70 billion in redemptions, the largest since the pivotal collapse of Lehman Brothers in September 2009, according to Bank of America Merrill Lynch data.
Stocks funds saw $11.2 billion in outflows, with long-only funds losing $6.5 billion, the largest since May 2010. US equities saw $8 billion in outflows. At the same time, commodities had inflows of $2.9 billion—primarily in gold funds—while bonds saw their first outflows in six weeks but at a relatively tepid pace of $1.2 billion.
Investors also bailed on municipal bonds, with an $800 million outflow marking the biggest such move since April, and safe-haven Treasurys saw inflows of $739 million, BofAML said.
Bensignor speculated that the trend was a snapback from investors who put their money into stocks during the Federal Reserve's quantitative easing efforts, which ended on June 30 . The Standard & Poor's 500has dropped more than 10 percent since the end of the Fed's second easing program, nicknamed QE2.
"If you look at the last six months of price action, you've gone nowhere until the last two weeks' decline, which probably means once again that retail clients got screwed," Bensignor said. "They piled into the whole QE2 theme over the last six to eight months and now probably again have losses."
The next true buying opportunity, then, will present itself when the selling fully runs out of steam and a near-term bottom has been reached.
Some measures investors will be looking at are the CBOE Volatility Index, which has doubled since the end of QE2, as well as whether gold prices fall, bond yields and stock volume rise and if traders start delving into less defensive stocks.
"You'll just get a sense that you've depleted the sellers, that the sellers are gone," said Quincy Krosby, market strategist at Prudential Financial in Newark, N.J. "Obviously it's going to start with short covering . Then what you want to see is if you can gain momentum from that. Each (capitulation) period is a little unique but also similar, like snowflakes."
Krosby thinks a 13 percent or 14 percent drop in the market would be a good place for capitulation. Bensignor said he is looking for the Russell 2000small-cap index to slip to 680 for confirmation.
Boockvar, of Miller Tabak, said he is less sure, but warns that the uncertainty will make for adventurous trading conditions.
"If you're going to play that game, it's a traders market," he said. "Granted if you have a three-year time horizon the market is presenting you with opportunities. In the short term you have to have a very short leash on any trade you have."