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Like Dark Cloud, Fear Hangs Over Market


Investors seem to be surrendering to the the Street


What is the antithesis of total capitulation? I suppose "never quitting" or "facing down fear" would qualify in a thesaurus, but I'm talking about the Wall Street definition.

Since the market cratered last summer the pundits have extolled the need for pure capitulation. There have been many sessions that looked and felt like they fit the bill but something was missing: a pocket of strength (a lot of time oil-related stocks) or there wasn't enough volume. The old school cats said we need the kind of fear seen when Godzilla climbs out of the ocean. Maybe it hasn't manifested itself in a single session but I think it's fair to say folks are sufficiently afraid. I continue to believe we will not get a typical capitulation but instead the newfangled and strung out months of fear. Surely at this point the weak sisters and even a few tough ones, too, have been spooked out of the game.

Then again that's the point pundits stress: that even the bravest of us all must quake in our boots. I think some investors are great students of history and know to hold and even to buy on weakness. Of course it helps to be a historian with a deep bank account. Investors in general are a lot more educated than they were in the past. Plus, Wall Street is Main Street news when it's getting hammered and being made the scapegoat for all the ills of the nation.

With that in mind investors and would-be investors are staying the course based on facts, sprinkled with some hope and hype. Old school guys used to also care about valuation and stocks are cheap based on a myriad of metrics, yet few of those same pundits are jumping up and down on soapboxes. To me when investors stare at value everyday but are too intimidated to pull the trigger it's a form of capitulation.

When the market is acting the exact opposite of when it's going gangbusters, that's a form of capitulation. When consumer confidence sinks to multi-decade lows, that's a form of capitulation. People are afraid. People not only seem fearful but they abhor Wall Street, which to me is actually a level beyond capitulation. When people open their mutual fund and 401-K statements and see footprints from a large reptilian monster they become afraid. They become very afraid. I think enough folks have quit the market over the past year to qualify as capitulation.

Nor at all can tell
Whether I mean this day to end myself
Or lend an ear to Plato where he says
That men like soldiers may not quit the post
Allotted by the Gods

"Mariana" – Lord Alfred Tennyson

Having said all those things about the notion that there doesn't have to be textbook capitulation the fact of the matter is one could argue that the financials did indeed experience massive sell off based on fear. The XLF was hammered this month on the largest increase in volume- ever! While we aren't sure if Wall Street has delivered that kitchen sink quarter there is no doubt investors threw in the towel on financials this month.

Click to enlarge

Okay, so what else was compelling in yesterday's session other than Merrill Lynch (MER) and the other financials? The interesting thing about yesterday's session and to answer my own musing, it couldn't have been the antithesis of capitulation because:

  • Everyone wasn't joyous and convinced the worst is over.
  • The volume was very low for a 266 point up day on the Dow.

Consulting was compelling although only Accenture (ACN) was the only one to trade convincing volume. By the way, not only is Tiger beating Phil on the links but his company in this space, ACN, has been a much better stock than Phil's Bearing Point (BE).

Solar stocks were fantastic yesterday. I think a lot of folks have given up on the sector despite rhetoric from Capitol Hill; these stocks were getting hit before oil began to stumble. The name that stands out is SunPower (SPWR) which traded 50% more extra volume than normal and is on the cusp of a major breakout. A close above $80 for this stock could trigger some of the shorts to begin to cover (23% of the float is short). Of course one can't look at this space and not like First Solar (FSLR). I'm still worried, however, for most of the American players in the space.

I keep mentioning the airlines and they keep taking off. Yes, they hit periodic air pockets that could turn an atheist to prayer. I like United Airlines (UAUA) the most in the space but American (AMR) stock acts like its ready to move higher, too. The space will trade with crude oil which is due for a trading bounce but the fundamental story has improved so don't let gyrations shake you too fast.

No positions in stocks mentioned.
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