getting hit hard anew, with tech company after tech company warning that results this year won't be up to snuff, with pessimism running high, the word "capitulation" is again rising from the market's lips.
And understandably so. The memory of October 1997 and October 1998, when (amid much gnashing of teeth) stocks screamed lower, only to rebound just as dramatically, persists. Both were classic examples of capitulative selling: investors becoming so frightened, and selling so heavily, that just about all the bad news there could be is priced into the market.
When it dawned on people that the world was not the shambles they had feared, stocks moved sharply higher. Those who had the courage to buy into the teeth of those downturns made an untold amount of money. Those who allowed fear to flush them out of their positions resolved to never let it happen again, to step in and snap up stock when the selling reached a fever pitch. And if they stuck to their vow over the past year, they probably lost an untold amount of money.
Since its March 10 top, every jag down of the Nasdaq has been met by a chorus of traders and technical analysts professing that capitulation has finally come. Indeed, each drop has had many of the earmarks: a flurry of selling, a fall in sentiment, a final, dizzying drop in the Nasdaq, followed by a snapback rally. And in every single case the dip-buyers have found that the bottom in tech that they were obsessively trying to buy was at some lower level.
"You can't act anticipating the low here," says
President John Bollinger. "It's just deadly."
While the many short-term bottoms the Nasdaq has put in have been tradable (for the extremely agile), they have not been investable. One of the problems is that so many people bought tech near the Nasdaq's high and remain deeply under water. Though most have given up on the possibility of being made whole again in these stocks, there is always the hope of getting less damaged. Thus many investors have come to view rallies as opportunities to clear out of positions.
The other problem is that when a bunch of people are sitting around, hungering to buy the dips, that isn't so capitulative. The slightest sign that tech declines have stopped is met by aggressive buying, like last week when, amid much chest-thumping and bottom-calling, there was a rush to buy after
reported a strong quarter. Two days later, a string of warnings quashed the rally.
"These are not the trading patterns that cause market bottoms," says Jim Volk, co-director of institutional trading at
. "You're still not seeing people walk away and say, 'Screw it, I'm not buying anything.'"
It may be that the true sign that the Nasdaq has bottomed will be when it makes only incremental, cautious gains. It would probably help if more would-be bottom pickers remembered the little bit of Wall Street lore about the small god that controls the trading pits. He has but three laws:
- You are allowed to buy the bottom tick once in your life.
You are allowed to sell the top tick once in your life.
You are free to do the converse as often as you like.