Tuesday, October 28, 2008
It looked like the stock market was ready to sell off hard on Friday.
The S&P 500 futures market was locked "limit down" – meaning it had reached the maximum allowed selloff before a mandated trading halt. Global markets were down anywhere from 5% to 12%. And with just over one hour until the U.S. stock market opened for trading, the CNBC anchors were completely demoralized.
It was as good a setup for a capitulation selloff as I had ever seen. So despite my long-standing rule to never enter a new position on a Friday (after all, who needs the added pressure going into a weekend?), I was getting excited about buying into a big decline.
But then the cheerleaders hit the field.
"If we open down 1,000 points," said one floor trader during a CNBC interview, "then this will be the biggest buying opportunity in a generation."
His comments were echoed by another trader, and then another, and another. Pretty soon, the futures markets started to stabilize. Investors stopped thinking, "How can I get out?" And they started thinking, "I can't wait to get in."
The Dow Jones Industrial Average opened almost 500 points lower and then started to rally. We never saw the advertised "once-in-a-generation buying opportunity." Instead, investors got a decline on par with any other decline we've seen over the past several weeks.
And all that did was push the final bottom back a few days.
Yesterday, we saw the exact same thing – a sharp decline in the overnight futures market met by willing buyers once the stock market opened in the morning.
Investors are more concerned about missing the chance to buy at the bottom than they are about suffering through another dramatic decline. And as long as that's the case, then we're nowhere near a real bottom.
Of course, it doesn't make any sense. After all, we can find any number of stocks trading at less than five times earnings. Many companies are trading for less than the value of cash on their balance sheets. And the dividend yield of the average S&P 500 stock is something like five times greater than what anyone can get in a money market account.
So intellectually speaking, stocks must be near a bottom.
But in order for the stock market to put in a real bottom, intelligence has to take a back seat to emotion. Investors have to surrender. They have to wave the white flag and give up on the idea of ever making money in the stock market.
We're not seeing that yet. Right now, average investors are thinking intelligently. They're buying stocks into the decline. They're looking at the fundamentals and deciding this is the time to put money to work. And of course, while they may be right in the long term, in the short term, their emotions have to be tested.
We came close to that point on Friday. We inched a little closer yesterday. Perhaps by the end of this week, we'll see the emotional capitulation from which the market can stage a strong intermediate-term rally.
Best regards and good trading,
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