It's all about market psychology

October 3rd, 2008  by Lou Muddaris

Closing Data

	Current	Change	%
Dow Jones	10482.85	-348.22	-3.215
NASDAQ	1976.72	-92.68	-4.4786
S & P 500	1114.28	-46.78	-4.0291
FTSE 100	4870.3	-89.3	-1.8005
All Ords	4774.1	-40.4	-0.83
SPI Futures	4680	-95	-1.9895
Nikkei	11154.76	-213.5	-1.878
Oil	93.87	-4.39	-4.4677
Gold	844.3	-43	-4.8462
Silver	11.12	-1.65	-12.9209
Copper	262.75	-16.2	-5.8075
Aluminum	2346	-30.5	-1.2834
Lead	1740	-66	-3.6545
Nickel	15605	-395	-2.4688
Tin	17655	+5	+0.0283
Zinc	1645	-2	-0.121

Capitulation Theory

The dictionary definition means to "surrender, or give up". It's derivation is from the German word "Kaput" which means broken. It happened on Monday when the Dow Jones capitulated 777 points recording its biggest one day fall in both percentage and point terms ever.

It's all about market psychology

For the past 10 months we have been in a bear market with gradual declines followed by sudden spikes but resulting in trending lower prices. The volatility was caused by traders/investors trying to pick bottoms saying "yep, stocks are too cheap on fundamentals, yields, P/E's etc…" So what happens? These guys are long and see their share valuations fall gradually by say10%. They hang on, it must bounce! Falls another 5% and yet more buyers enter saying the same thing. It gets to the point where everybody is long and hurting until the pain emotionally and financially causes panic. They don't care what price they cut their massive losses at; "just get me out of this disaster". The domino effect is self generating so the buyers are bidding at crazy levels and yet still they get filled!!

The 3 characteristics of Market Capitulation were there on Monday;

1. Massive volume, one of ,if not the biggest volume day ever,
2. The biggest drop in percentage terms and dollar terms, and
3. Buyers were picking up shares which valued some companies as basically bankrupt; companies which have strong balance sheets and no debts!

The same situation happened in the stockmarket crash in 1987, the Asian crisis in 1998, the "Tech Wreck" in 2000, and more poignantly 9/11 2001…if you had bought on those capitulation days then today you would be up squillions!

It's all about people's psychology as they panic and surrender to the unemotional buyers such as Warren Buffet whose war cry is "Sell when everybody is buying and buy when everybody is selling". That's why he is the world's top trader and still trading at 78 years old! Incidentally, God said yesterday that "The U.S economy is flat on the floor having had a cardiac arrest."

About last night

The Dow Jones fell over 300 points on one simple reason: UNCERTAINTY. There is nothing more traders hate than uncertainty and we have it by the bucketful at the moment. Is the bail out going to be passed by the House of Representatives? Are the European Central Banks at tomorrow's meeting going to implement a $420 billion rescue package or are the Germans going to have their way? Are the money markets wheels going to start turning again? (This is critical as highlighted in last Friday's Fox Report). Are the Sea Eagles going to beat the Storm?! (sorry , I couldn't resist!)

Last night saw more painful U.S. economic data with weekly jobless claims rising to 497,000, its 9th consecutive gain. Many economists are saying this is the stuff of a recession, but remember stock markets do rally in recessions. Tonight we see the crucial monthly non-farm payrolls with expectations of a 100,000 fall….again worth staying up for, released at 10.30 pm.

Alan Greenspan

The longest serving and most respected Fed Governor said last night that "Stock prices will recover sooner rather than later". Again, like Warren, when he speaks you listen!

BHP

Don't panic! Although on the charts the break of $31 looks negative. It's still looking cheaper…too much to say here please call your adviser!TRADE RECOMMENDATION

We firmly believe now is the time to buy Blue Chips but we also realize many of our clients like to have the odd speculative stock in their balanced portfolio. So here's one: Ipernica (IPR)

This company is a diversified technology and intellectual property group trading at 12 cents. Reasons to be positive:

1. They have just returned from ASX suspension having taken on and won a copyright legal case against Deutsch Telekom. Similarly, Cisco paid them a $30 million out of court settlement. Next stop they are suing Oracle in January for more copyright infringements.
2. They released their profit figures on September 26th. No debt, cash rich, 112% increase in profits to $15.2 million plus a bullish outlook statement.
3. And this is the Gem! If you buy shares before Oct 20th then you will receive a 1 cent dividend on October 28th, now that's a fully franked yield of 10%!

Our IT guru says that's what all the big corporates do; basically steal others ideas and get away with it as they don't expect to be taken on and lose in the courts.

Must say it is speculative but that 10% yield is attractive, they have no debt and issued a positive outlook. Check them out on the ASX web site under IPR. Alternatively call us!

Two reminders

1. Clocks go forward on Sunday meaning Queenslanders see the market open at 9.00 am and close at 3.00 pm
2. Money doesn't buy you happiness it just lends it to you for awhile.

Quote of the day: "The early bird gets the worm but the second mouse gets the cheese"

Contact your Freeman Fox Stockbroker on 07 3031 9960 or 1800 003 369 Ext 7.

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