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MAKING CENTS OUT OF THE NEWS
Blog #11
(March 12th, 2009)
SITTING OUT BY SITTING IN
By Tom McAllister, CFP
Get me out! Sell everything! I hate stocks!
That's the attitude that triggers selling climaxes on Wall Street. Investors "give up" on stocks and rush towards less risky money havens. Capitulation means panic selling by investors who can no longer cope with the emotional and financial pain caused by their losses. While scary, experts say, the frenzied selling often signals the final phase of a bear market, because when all the sellers are gone, there is only one direction stocks can go - up!
So has this happened? Have investors bludgeoned by The Bear reached the point of no return? Have they given up hope? Have they surrendered - or will they soon do so, throw up their arms, wave a white flag and give up on stocks for good? That has been the big debate raging on Wall Street in recent weeks, after brutal selling sent the Standard & Poor's 500 Index reeling to new bear market lows. And what about this week's stock market gains? Is the capitulation past, or are the final death throes of the bear market still to come?
The answer lies mainly in how you define capitulation. In general, there are two types. The most common is a massive one-day meltdown, like the Dow's 22.6% plunge on "Black Monday" back in 1987. The other is more of a slow, steady decline where stocks keep grinding lower day after day, week after week, month after month (sound familiar?). It is said of stock market investors, "You can either scare them out or wear them out!"
Alas, market analysis, even at its finest, is no exact science, and capitulations are often evident only in hindsight. Meanwhile, whether capitulation has occurred or is yet to arrive, there's no denying the stock market is in bad shape. An army of buy-and-hold individual investors have watched their stock portfolios and once-plump nest eggs decline sharply during this seventeen-month bear market.
Most mom-and-pop investors appear to be riding out the market turmoil. A study by financialpsychology.com found that only 7% of investors sold because of recommendations by their financial advisers. There are psychological triggers that could spark selling if stocks keep falling, Investors might sell if:
They can no longer cope with their feelings of fear.
The uncertainty of where the bottom lies becomes intolerable.
(They'd rather incur the loss and regain certainty.)
Peer pressure kicks in. If the herd sells, it's likely to be a stampede,
just like it was on the way up.
One simple gauge is how many stocks are going down or up on a given day. In a true selling climax, for every stock that rises, 10 decline in value.
Trading volume also offers clues. If the bulk of the volume is concentrated in declining stocks, it tells you that investors are looking to get out at all costs. Volume is normally huge during capitulations.
Signs of decreasing investor complacency and increasing pessimism are also good contrarian indicators. The more pessimism there is, the less likely that investors are fully invested and the greater the funds held in cash reserves. That money on the sidelines can be put to work quickly when stocks hit bottom.
As for us at McAllister Financial, we are "sitting out" - by "sitting in", opting not to participate in capitulation panic selling and remaining fully invested in our accounts.
With all the rapid changes in our economy and in the investment markets, there are many investors who would benefit from more consistent guidance. We are currently accepting new financial planning and investment clients, and would appreciate your referrals.
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