Bears Going into Hibernation
By: Daniel Eskin Mon, Oct 13, 2008
In the last two weeks, Warren Buffett has put about $8B into the market. Obviously, Buffett is a very wise man, and is known for buying when there are sufficient “discounts” on the stocks that interest him. Many thought that his vote of confidence would have brought turnarounds to the aching markets. But traders and speculators were trading against any logical patterns lately, and ignoring positive events such as Bush’s rescue plans and strong earnings from key firms such as IBM and GE.
Until Friday.
On Friday, the markets purged. Or, in a more business savvy term, they capitulated, which means that sellers decided to finally and fully give up on previous gains (or losses) as a final effort to get out of the market to less risky investments. In other words, the bears have all finished selling, and the last seller has sold, so now the bulls will start buying. Whereas in the last few weeks, we have seen stocks decline towards the end of the day as people get rid of their investments to avoid overnight surprises, market capitulation is characterized by very high trading volumes which occur early in the day, which we saw on Friday. The Dow went as low as 7,882 on Friday (loss of nearly 8%) before closing at 8,451.
Based on a CNBC article, about 3B shares traded hands Friday, which may very likely be the volume to achieve the long-awaited capitulation point. You can bet many traders sighed in relief at 4:00. Is this turnaround going to sustain? Jim Cramer didn’t think so, and believed that today would mimic the renowned, Black Monday. Take a look here.
Jim was obviously wrong as the markets are rallying today.
Last 3 posts by Daniel Eskin
- Expert Interview - Puru Saxena - March 9th, 2010
- Memory of a Crisis - March 8th, 2010
- Blogger Interview - Babak - March 2nd, 2010
Tags: bear market, black october, bull market, investing, markets, stock
Looking back on the markets over the last month it’s clear the minor rallies have all been false indicators of potential strengthening. We’ll have to stay focused on credit markets (TED & treasuries), looking for loosening as either a predictive indicator of when to buy back into equities, or at least a sanity check to confirm the formation and departure from a bottom.
At the very least, some incremental buying right now is reasonable. Just make sure to stay focused on individual value, estimating and valuing cash flows, adjusting for risk.