Bears Going into Hibernation

Daniel Eskin — Mon, 13 Oct 2008 17:06:23 +0000

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.

Young and Invested » black october

Bears Going into Hibernation