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Warning: Capitulation Not Yet Confirmed
In my Monday Night Recap on blogspot, I highlighted volatility and said the following:
The VIX is back above 30, but be careful. This year, a VIX reading above 30 has been a good signal to buy. But be careful, it can go higher. Here's a chart of the VIX going back to 1990, and you can see that it went above 40 in 1998, 2001, and 2002. I can't pull up a chart that shows it going back further, but I've read that fear has been much higher in the panics of the past.
Well, today the VIX closed above 36, near its highs for the year. The intraday high was January 22, at 37.57. January 22 was a "capitulation day" marking a short term market bottom, and I've written about how I sold some stocks in a panic, only to realize my mistake as the market reversed.
Some are saying that today was a capitulation day in the financials. With all due respect, I'd wait to make that call. Capitulation could be close, it could even be tomorrow, but there's no reason to try to guess. There was no meaningful reversal today, and that light at the end of the tunnel could be that of an oncoming train. As I've said before, What happens when government interventions of increasing size and scope fail to spark rallies? We now know what happens: more fear.
Frankly, with the unprecedented events taking place right now, volatility should be as high as it is, if not higher. Remember these wise words from Keynes: "The market can stay irrational longer than you can stay solvent." And these wise words from Todd Harrison of Minyanville:
Is "this" capitulation? Not through my lens. Not with the VXO at 37. Not with the BKX 35% above the July lows. Not with everyone asking if it's a capitulation. I've lived through capitulation, my friends--it occurs when you don't care, when you stop trying, when you wet your pants.
Also please note this chart from Minyanville that compares the current S&P 500 track to the 1971-1976 track. As they said, the fundamentals behind the move are different, but the psychology is the same.
Risk right now is two-sided. If you are long, you could continue to get punished. There could be a significant market dislocation (as if 800 points in the Dow isn't enough for you already). On the other hand, if you are short, you could get squeezed very quickly. If you can't sleep at night, by all means sell something or hedge, but don't add more risk. This is a bear market. We are down around 26% from our highs last year, but we can go lower (even much lower) as we have in past bear markets. We don't need to predict the next move, but we should be ready for anything. There's nothing wrong with cash until the dust settles. Good luck out there.
Note: Posted simultaneously on my personal blog, with charts and pictures.
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