The Wall Street Journal-20080123-Ahead of the Tape
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Ahead of the Tape
Are We Seeing
End of Wait
For White Flag?
Capitulation was a bad thing for Neville Chamberlain. In the stock market, it's just what investors are waiting for. In such surrenders are bear markets broken.
Capitulation is when investors throw up their hands and rush for the exits -- sometimes a strong buy signal because it leaves most bad news priced into stocks and bargains in its wake.
Is that what we've just witnessed?
Just after yesterday's opening bell, the Dow plunged 460 points on heavy volume. The Chicago Board Options Exchange's volatility index, also known as the VIX, a key measure of market fear, spiked briefly to 37.57, its highest intraday level since October 2002. Declining shares outnumbered advancers by a ratio of 5 to 1 on the New York Stock Exchange.
The market's ability to claw back from panicky selling resembled the action on the "Terrible Tuesday" that followed the Black Monday market crash in October 1987. Then, as yesterday, people sold stocks in the morning, then came back for bargains.
The problem with capitulation is you never know you had one until well after the fact. Think back to August and November, when stocks touched short-term bottoms in frenzied selling and climbed partly out of the pit, only to resume digging later.
This seems more likely to be another of those episodes.
Most of the 12 key market-bottom indicators tracked by Ned Davis Research -- which include readings of market volume, breadth, volatility and sentiment -- still aren't at extremes seen at other watershed moments of capitulation. The VIX, for example, spiked above 40 in each of the past three major bottoms.
With the outlook for the economy and the Fed's handle on it still uncertain -- and with Wall Street still apparently optimistic about earnings growth -- the Chamberlain moment may not have arrived.
Housing Market Fix
Is Unlikely to Be Quick
Wall Street is hungry for quick fixes. Every time a bank gets a capital infusion or the Federal Reserve cuts interest rates, investors start wondering if the worst is over. Maybe the market is saying the economic damage of the housing bust is too deep for fast solutions.
The Fed's surprise rate cut yesterday came a week after Citigroup Inc. and Merrill Lynch & Co. rounded up a combined $19.1 billion in capital from outside investors and just a few days after President Bush floated a $150 billion economic-stimulus plan. None of these moves averted a global stock selloff.
While market meltdowns can happen in a flash, housing cycles tend to unfold slowly. Consider the real-estate cycle of the late 1980s and early 1990s. Builders broke ground on 1.8 million housing units in 1986, and then watched the construction market sink for five years before a recovery kicked in.
Complicating matters, Wall Street's loan-securitization machine is broken. Investors are wary of the structured products peddled by investment banks and the triple-A credit ratings that come with them. While some investors may start sniffing out deals in this market, many won't return for some time no matter how low rates go. It doesn't mean the Fed shouldn't lower rates. It does mean investors shouldn't expect easier monetary policy to be a quick cure to economic ills.
-- Scott Patterson
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