It is one of those long-time market truths that the market must hit the point of capitulation before recovering. Today, the Dow fell 512 points, the worst daily performance in 2 1/2 years. We are now down 10% from the April highs, which makes this an official "correction." (An official bear market is a 20% decline from the top.) The volume was also very high, almost 6 billion shares traded. Heavy volume usually indicates the strength of the move, which means this is a real market slide. But, are we close to the point of capitulation, when retail investors sell just to end the emotional pain, so the market can start improving? I hope I'm wrong, but I don't think so.
Today was not the point of capitulation. It was a day of realization. For the last month, the American mindset has been so focused on the ugly, demoralizing debt deal that it didn't notice the growing severity of the European sovereign debt problem. Even worse, we realized today that the European officials are in a state of denial about their own problems.
The Euro-zone is bigger than either the U.S. or China and even harder to govern. We are being whip-sawed by their problems. If you are an active trader (as opposed to an investor, who thinks longer term), you will go to bed tonight without knowing what Europe will be doing to your portfolio tomorrow morning at 4AM local time. In that case, you are better off holding cash tonight. Therefore, you sell your U.S. holdings today.
Even more problematic, Friday afternoons are the most volatile part of most weeks. But most problematic is that tomorrow is "Jobs Friday." If the report is much different from 80 thousand jobs, the market could be very volatile. Then, there were rumors in Chicago this afternoon that tomorrow's Jobs Report will show a negative number. If so, your printer will probably need a new red ink cartridge!
While today may not be the day of capitulation, it is a good time to remember Warren Buffett's timeless advice to be greedy when others are fearful and to be fearful when others are greedy.
