What a Week: Waiting on the White Flag

Investors got spooked this week, but didn't give up the ghost. Whether that's good news or bad depends on your perspective on the much-discussed issue of capitulation.

Some believe capitulation -- frequently characterized by a heavy volume, panic-type session where investors clamor to sell stocks regardless of price -- has already occurred, either last September or over the course of the past two-plus years. Others contend it isn't necessary for a rally, although hardcore skeptics say it's a prerequisite for the bear market to end.

I suspect many readers are sick of the topic. But the capitulation discussion remained dominant this week as major averages sustained several sessions that reeked of a watershed selloff, only to pull back from the brink.

Friday's session was the most glaring example, as steep early losses triggered by an overnight bombing at a U.S. consulate in Pakistan and a weaker-than-expected consumer confidence report, were all but eradicated by day's end.

The Dow Jones Industrial Average closed off 0.3% to 9474.21 after trading as low as 9260.99, its lowest level since Nov. 2. The S&P 500 finished down 0.2% to 1007.27 after hitting a nadir of 981.63 and making its first trek below 1000 since Sept. 25.

The Nasdaq Composite closed up 0.5% to 1504.74 after having traded as low as 1445.44, its lowest level since intraday on Sept. 27.

While impressive, the comeback couldn't salvage another downbeat week for equities. For the week, the Dow lost 1.2%, the S&P 500 shed 2%, and the Comp declined 2%.

Friday's session was eerily reminiscent of the previous Friday, when the Dow closed down 0.4% at 9589.67 after trading as low as 9472.54, while the S&P 500 ended off 0.2% to 1027.53 vs. an earlier low of 1012.49. The Comp ended down 1.2% to 1535.48 vs. its nadir of 1495.81.

That turnaround brought out a bevy of bottom callers (much as today's did), although Jeffrey Saut, chief equity strategist at Raymond James was not among them, suggesting the market rarely, if ever, bottoms on a Friday: "If we show up Monday or Tuesday and get a 'I think I'm going to be sick'-type hour, I would buy that for a trade," he said last Friday.

But Tuesday's session -- which saw early gains evaporate in a psychologically damaging late-session swoon -- didn't qualify either, Saut said Wednesday. Neither did Wednesday's session, when the market appeared on the verge of breaking down, only to produce a late-session rally amid rumors Microsoft (MSFT) would pre-announce better-than-expected results. (No announcement was forthcoming but the software behemoth helped lead Friday's comeback, too.) Even Friday's early action didn't qualify as capitulatory, according to Saut.

"I wish I could say 'that was it,' but I don't believe it," he said Friday afternoon. Had the morning weakness, which accelerated after the weak consumer confidence report, "cascaded off 500 or 600 [Dow] points, that would have been" the type of capitulation so many market participants are awaiting, he said. "Close, but no cigar."

The strategist reiterated a belief that bottoms rarely occur on Fridays: People will "brood" about the market over the weekend and there will likely be some margin calls going out Monday morning, he said. Possible candidates being shareholders of Friday's big losers, including Genesis Microchip (GNSS), which fell 26.3% after a profit warning, Sprint PCS (PCS), down 26.5% after posting disappointing subscriber growth, and any number of wireless names, which tumbled on that news and downgrades by Merrill Lynch and J.P. Morgan.

Furthermore, the combination of Thursday's weaker-than-expected PPI and retail sales data plus Friday's economic reports "bring back all the worries about deflation and a double dip," Saut said. "I'd be really [careful] about trying to bottom-pick this thing. There are old traders and bold traders, but no old, bold traders."

Searching for Signs

There are indications some investors are throwing in the proverbial towel, which has historically predicted a good entry point for prudent buyers. AMG Data Services reported equity funds suffered outflows of $3 billion for the week ended June 12, the second consecutive week of outflows. That followed inflows of $6.5 billion in May and nearly $58 billion in the first quarter.

Despite the steady beat of long-term inflows (suggesting no capitulation among retail investors has yet occurred), "a buying opportunity is not far away," according to Sy Harding, publisher of The Street Smart Report.

"Investor sentiment is getting about as pessimistic as it usually gets at intermediate-term market lows, and the market itself is also becoming quite oversold on technical indicators," he said.

On Friday, the Chicago Board Options Exchange equity put/call ratio peaked at 1.46, the Volatlity Index (VIX) at 36.01 (its first trade over 30 since mid-November) and the one-day Arms Index at 4.83. Each of those sentiment readings ended off the session highs but those peaks presented the kind of fear market watches look for at near-term bottoms.

Notably, Harding is no permabull. In fact, he penned a book entitled, "Riding the Bear: How to Prosper in the Coming Bear Market" that was published in 1999.

In the book, Harding discussed how history suggests the bear market he foresaw and that is now unfolding wouldn't end until investors are pulling their money out of stocks with the same fervor as they put it in at the market's top.

"We're nowhere near that situation of complete capitulation yet ... but bear markets do not move in a straight line down," he said Friday. The market-timer reiterated a long-held view that major averages would retest the September lows -- today's lows being "close enough ... to have us paying attention" -- and then enjoy a "significant summer rally."

If such a rally began Friday, or soon hereafter, it won't be soon enough for beleaguered equity investors. They suffered again this week even as the bulls clung to hopes their pain will soon be ending.

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