Stock Market Capitulation

March 21, 2009

A key factor is preventing huge selling of shares and augurs for an equities rebound is the piecemeal nature of attempts to rescue banks and the economy, according to , Sitaraman Shankar. “We need to see an index falling 7 or 8 percent intraday in high volumes and then ending up nearly flat on the day as the buyers come back in,” said Philippe Gijsels, strategist at Fortis in Brussels. “What we’re getting instead is Chinese water torture, and no massive cleanout. Governments and central banks are tending to watch markets and giving small glimmers of hope, not enough to take markets higher, but enough to prevent a sell-off.” So for capitulation to happen, markets will have to be hit by a big, negative news event, and for the rebound to be sustainable, the overall environment would have to improve. “We need to see an event that would shock everybody, a big US bank failure, or a country in going broke,” said , fund manager at Life. Bon said positive factors that would need to be in place for any strong rebound included an improvement in consumer or business confidence indicators, some merger and acquisition activity, successful rights issues and a belief among that company had bottomed out. “We would have a sharp sell-off triggered by an event, and then a turnaround as people reversed their short positions and bought into a rally,” he said. The .MIWD00000PUS hit its lowest point since April 2003 last week. The index fell more than 43% last year, punctured by a credit market crisis with its origins in collapsed subprime U.S. , and is already down 16%this year. Between November 2008 and January 2009, there was a 27% rally driven by investor relief that governments were acting firmly to deal with the crisis. Since January 2009 global equities have slipped steadily as it became clear that the moves were not enough to stave off a sharp in top economies. NO CAPITULATION = SMALLER FALLS, WEAKER RALLIES

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