You know what they say, no pain, no gain right? This rule operates on Wall St. as well. No one wants to see a boat sink but that’s the funny thing about boats – there’s only two possibilities with ships – they’re either floating or sinking… whatever floats your boat right? My apologies for the quip but my prediction of a bear market and a major pullback in the U.S. stock and bond markets [circa 3 months ago?] turns out was fairly on target. Now everyone keeps asking, “Have we seen capitulation yet?” All those financial market show commentators [gotta love them] bring on their guests to ask them one key question – “Is this capitulation? Is the sell-off on Wall St. finished, and is it now safe to get back in?” And on and on, let me just say if one has to ask the question then the answer is “No”, this market has not capitulated. That’s pretty much the reality of the situation. If you still have to ask that means you haven’t seen the bottom yet. Real capitulations are very nasty, they come in shock and awe only – they don’t come in “pretty”. What I am describing here is the end of the selling on Wall St., a virtual exhaustion which usually marks a bottoming process. Capitulations are difficult to describe, but you’ll know one when you see one. So again, I would like to convey that we have not seen capitulation yet, not as of this writing anyway…

Market meltdowns are usually a “process”. However, there are warning signs that a market correction, or even a market crash could be imminent, or at least in the making. This process can sometimes be drawn out, this one, in particular, appears to me anyway to be one of those drawn out affairs? A good sign that something bad is brewing is when stock price appreciation [en masse] begins to narrow. Meaning the market leadership, and fewer and fewer stocks are making new 52-week highs then we’re basically down to only a handful of companies still hanging in there, this is known as a narrowing of leadership et. al. Should this trend not reverse itself and continue, it usually spells trouble. [I don’t have statistics here for you on that measure, but the U.S. stock market began narrowing in the early Fall of 2021, so it’s a trend that has been in place for awhile]. In fact, my understanding is most stocks listed on the major exchanges have fallen 20-50% off their all time highs. While conversely, you have only a handful of stocks, [market leadership], that are still holding up the major index averages, albeit in correction territory. This happened in 1999 which preceded a 3-year bear market, the market did not find a bottom until May of 2002. Needless to say it was a very difficult time for many investors.

I have to interject a story: It was May 2002, and my cellphone rang, it was one of my best clients on the other end. He said, “Brant I think I should just get completely out of the market, this thing just keeps going down, and I don’t see any hope at this point… what do you think?” I was successful in talking him out of it, at least deferring his decision. That’s when you know you’ve reached capitulation right there. When someone is willing to take a large haircut just to end their misery – that’s capitulation. That very day happened to mark the bottom of that bear market. And the next time I heard that same conversation from that client was another market bottom, it was early March 2009. Then I knew for certain I had my “market bottom” indicator in place, as he was two-for-two now – a great gauge, indicator of indeed what never to do when the market has bottomed. [I had another good client who was my market top indicator – he would get aggressive only when levels of investor speculation had peaked, his bad timing marked the market’s top each time!… I just never had the guts to tell him.] 🙂

Back to the theme of this post. Narrowing leadership usually ends in at least a correction, or pullback of 10% [ we have already experienced that]. Deeper corrections are considered pullbacks of 10-20% [the NASDAQ Composite Index has already fallen 22% off it’s all-time high this year]. The last time I recall that the S&P 500 index fell 21% was back in 2011. That event was ugly and occurred rather quickly. It was predicated on the Ben Bernanke led Federal Reserve announcement that it was ending its Quantitative Easing (QE) program. The market was spooked once the Fed announced it would end its QE program in order to let the U.S. economy operate on its very own, without Fed intervention. Imagine that, scary huh? Now fast forward to today when we’ve seen how many QE’s? QE’s to infinity almost! 🙂 That’s certainly part of what got us into this mess in the first place, way too much stimulus over the past two years. All that does is distort prices in markets for both stocks and bonds, and really all financial assets. When too much capital is chasing stuff we’ll eventually end up with people thinking things like SPACs and Cryptos are a great place to park money. However, I believe that really speculative financial assets such as SPACs and Cryptos could hold the key here, they could be a valuable source of information for us in observance of their price movements. Treasury Debt and Cryptos could be the best indicators we have going forward now to detect a “true” market capitulation, or bottoming process for all financial assets. SPACs for the most part, have been destroyed at this writing, however, Cryptos have not really acquiesced to much selling pressure, virtual currencies are still hanging in there. And we can’t get to the healing process until this market completely capitulates. So unfortunately, this could be a drawn out process, like the year 2000 with many months of pain to get resolved. So while we hate to see more financial destruction, some people will need to pay for taking wild risks. Bend over you speculators! 🙂 That’s why they make tall buildings, not only to provide office space. No, tall buildings also make a great place to jump off of…