Capitulation
What is a bear market?
Generally a bear market is one where the market has decreased by more than 20%.
With the Australian market down 36% since the highest point for the market which was reached 1st November 2007, the Australian market has been in a bear market for the last 11 months.
How does it end?
The end phase of a bear market is capitulation. Capitulation is when investors give up on stocks. Generally the view is that stocks are a bad investment and there is mass selling over a short period of time. The problem this time round is that the media is full of talk of capitulation which in itself indicates that total capitulation hasn’t come yet. When real capitulation arrives, few will recognize it and ring a bell.
Volatility is another indicator of the end. The Volatility index or VIX index on the Chicago Board of Options reached an all time high last week indicating extreme volatility. Extreme levels of volatility are usually associated with turning points in the market and not in trend continuation.
Most brokerage houses are taking a cautious wait and see attitude.
What can I look out for?
Capitulation or the end phase of a bear market usually involves extremely high volume and sharp declines. Panic selling and capitulation usually signal a bottom of a bear market. Talk of people stashing money under mattresses and generally a flight to safe assets such as bonds and cash. It’s when there are no sellers left in the market and only exhaustion. The only problem is that it is very hard to pick the bottom.
What is it time to do?
With many market watchers calling the bottom of the market, it’s time to be increasingly cautious. It does look like we are in a bear market rally with a potential gain of 20% or greater but the long term trend still remains bearish. Total capitulation hasn’t happened yet. For that, you’d have to have exhaustion. For most people, it’s hard to know where the bottom is. One fact is that prices are at very low P/E’s so perhaps for the very brave it’s time to start accumulating. Just don’t expect the bumpy road to be over.
Australian market perspective
Our markets down 35% in the past year but things need to be viewed in perspective.
From the start of the Bull Run in 2003 to the peak in 2007, market increased by 150% and that’s not even including the dividends. If you include dividends then that figure rises to 200%. So far this year, the market is down 30%. The best thing is if we have seen a bottom and you bought in at the bottom, by the time the market gets back to the Nov 2007 level, the market would be up by more than 70%.
