Tuesday, March 3, 2009

The Possibility of a ‘Stealth Bottom’

The more I hear about the need for some sort of dramatic capitulation to affirm that a bottom has been made, the less likely I think it is going to happen. Instead, my thinking is that the longer and steeper the bear market, the more likely that any sort of capitulation will happen in stages.

Frankly, I find a scenario like the 2002 NASDAQ bottom to be a better template for a bottoming in the current market environment than most of the other possibilities that have been discussed. In VIX Spikes and the 2002 Market Bottom, I noted how the dot com bear market saw five VIX spikes of decreasing magnitude and ultimately found a bottom on a relatively small VIX spike and unremarkable volume. In short, it was a stealth bottom.

I would not at all be surprised to see the current bear market end in a similar stealth bottom. Sometimes a desensitized investment community is more likely to form a bottom than a panicky one.

8 comments:

fluxam said...

"desensitized"...or just worn down?
Perhaps most contrary opinion indicators are ambiguous because NOBODY CARES!
What think you this Bloomberg:
"Options investors are paying twice this decade’s average to protect against losses in U.S. stocks through 2011...
'There’s a real panic in the markets, with some people wanting to buy long-term insurance at any price,' said Peter Sorrentino...at Huntington Asset Advisors Inc. 'People have lost hope.'
Options traders see little chance of relief..."

Jeff Pietsch CFA Esq said...

Also note how new 52-week lows has contracted on each dip, prior strong holds have finally "caught up." Those that want a capitulation event ought to consider the percentage change in index price over the last ten days alone. Lastly, caculate what 200 Dow points today would have represented 18-months ago...

Anonymous said...

well said. the fact that some of GE's leaps are trading at 85% IV speaks volumes......

John said...

I agree with Jeff... Stealth or apathetic, one would think that the average vol on GE, BAC, JPM, XOM, and MSFT will have to be a lot lower before we see a quiet non-climactic bottom put in. With many stocks now trading under $10 and flirting with non-margin rules at under $5, the odds of some really big percentage swings are a lot higher, in my opinion. Plus, as we near 1Q earnings... Well, it is not going to be fun.

Dave Narby said...

Personally, I think it's because the BILLION DOLLAR MARGIN CALLS that were being made in October and November have stopped.

This was misinterpreted as 'panic selling', when it was really *forced* selling.

Now that those calls have been made, and the losses have been booked, they cannot be made again, as the credit they were made on has been destroyed.

IMHOP, that level of selling not only will not be repeated because it cannot be repeated. The leverage is gone.

...Until the next big equity bubble 70 years from now, naturally...

Jeff Pietsch CFA Esq said...

Re: Leverage reduction... I'm hesitant to agree only because, as debt has been reduced, equity has also been destroyed. I'm thinking our leverage ratios are higher than we'd hope.

Dave Narby said...

@ Jeff

That's a big unknown... How much 'leverage' (bad debt) is left. Combined with what is for all purposes arbitrary government interference, you just can't figure out what anything is worth.

Which is probably why we're dropping below many trader's 'oversold' conditions.

But due to the fact that we haven't heard any reports of any new billionaire margin calls (or further hedge fund implosions), I just think we're not going to see what was misidentified as 'panic selling' any time in our lives again.

We could however, see more selling from here. Theoretically right down to replacement value... Whatever that is!

I expect though we'll get a monster bear rally soon... When the bears run out of ammo. The trading sites I follow have a slew of bears willing to 'short into the hole' to the bitter end (it seems).

Raju said...

Thanks for the nice post.

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