Thursday, March 05, 2009

Market Capitulation Means Opportunity to Take Real Money Out of the Market


A market capitulation occurs when investors surrender all hope of recouping their losses in the market. For me, a capitulation means when investors "puke", or cry uncle. We could be on the edge of a market capitulation right now. It could happen as early as tomorrow morning or Monday morning.


In order to win big at the point of a market capitulation you have to be ready to roll before it happens. You might be expecting a capitulation several times before it actually happens. But, when it does, you can take real money out of the market.
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Here is how you take advantage of a market capitulation. First, you identify a small number of great companies whose stocks have been getting hammered because the market is going down, not because they are doing poorly. You have your orders placed in the market well before the market opens in the morning. You place those orders on the stocks you want to buy 8-10 percent below the previous day's close. You are ready to roll.

When a market capitulation occurs, a virtual tsunami of orders all come in on one side--sell orders. When the orders start piling up, funds manager realize they are going to need to raise cash. So they take the easiest, most efficient path to accomplishing that mission--they hit the bid on the best capitalized companies with the biggest bid regardless of the long term outlook on the company. They need cash and that is the name of the game.

When the herd sees their stock getting slammed they are not thinking about the above, they are thinking about survival. They fire in their panic stricken sell orders. The short term investors who have been trying to pick the bottom for a long time can no longer stand the heat. They sell and add fuel to the fire (well, fire sale).

You now have perfect storm--nothing but sellers. Sellers willing to part with stocks at any price--no matter how low. And, you are willing to buy at those amazingly low prices.

Do you know how many stocks traded at prices never to be seen again on October 19, 1987? Imagine buying Intel (INTC) at 88 cents a share, or Microsoft (MSFT) at 31 cents a share (adjusted historical prices, Google Finance).

That is what opportunity looks like when it knocks.

You will be well advised to be placing orders in the market before you go to bed. Remember, 8-10 percent below the last price.

Market capitulations are impossible to predict. But, we may get one here.

Ask yourself this question--are investors reaching the point where they can't take it anymore? Are 100,000s of investors all around the world getting ready to throw in the towel? The phenomena that is getting ready to occur is known as the--madness of the crowd. This could be it.

Please note: I am the same guy that said, Cash is King, back in September. I wrote-- Financial Meltdown--Where there is Smoke, there is Fire--an article that predicted AIG and the coming financial debacle. The S and P 500 was well above 1200 when I wrote that article. You could have read it right here at All American Investor.
Bob DeMarco is a citizen journalist, blogger, and Caregiver. In addition to being an experienced writer he taught at the University of Georgia , was an Associate Director and Limited Partner at Bear Stearns, was CEO of IP Group, and is a mentor. Bob currently resides in Delray Beach, FL where he cares for his mother, Dorothy, who suffers from Alzheimer's disease. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. His content has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.


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