Keep your Valium ready

Judging by today's trading in stock index futures, Tuesday could be a very, very tough day on Wall Street. The futures contracts activity points to a 520-point opening in the Dow, the steepest drop since 2001. Keep in mind that trading today was light because of the MLK holiday, and that index futures are not always reliable gauges of what will happen during the actual trading session. But even a cockeyed optimist might consider moderate doses of drugs or alcohol, just to be on the safe side. We could be reaching what's known as market capitulation, which is when investors have given up on recapturing lost gains from stalling stock prices. Investopedia offers this explanation:

Suppose a stock you own has dropped by 10%. There are two options that can be taken: you can wait it out and hope the stock begins to appreciate, or you can realize the loss by selling the stock. If the majority of investors decides to wait it out, then stock price will likely remain relatively stable. However, if the majority of investors decides to capitulate and give up on the stock, then there will be a sharp decline in its price. When this occurrence is significant across the entire market, it is known as market capitulation.

Market capitulation can actually be a bullish sign, an indication of a bottom in prices and thus a good time to buy stocks. The problem is that it's very hard to know when capitulation has arrived. It's a little like trying to forecast a recession - you know only after the fact. Here's more from the NYT:

Investors in Asia have been in a state of denial about a possible recession in the United States, said Adrian Mowat, JPMorgan’s chief strategist in Asia. But now, he said, “there’s no debate about it.” The only question, he added is “how long and deep” a recession might be. In Japan, which may be facing a new recession of its own, most indexes were off by more than 3 percent. The angst about the United States belies the popular theory that Europe and Asia are not as dependent on the American economy as they once were, in part because they trade more with each other. The theory, known as decoupling, has been used to explain why economies like China and Germany have kept growing robustly, even as the United States has slowed. “The market is not at all convinced about decoupling, and I think the market is probably right,” Mr. Mayer said. “When you look at it more closely, we’re suffering from the same issues.”

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
 
Mark Lacter, business writer and editor was 59
The multi-talented Mark Lacter
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