Capitulation commences

Published September 17, 2008
MONEY MATTERS
Based on both fundamentals and technicals, US financials are likely to retest and break below July lows
Source: Businesstimes.com
By LIM SAY BOON
The writer is the chief investment strategist for Standard Chartered Bank's Group Wealth Management and Private Bank.

Small note: Always find the concept of capitulation very interesting: the feeling is like meeting the end of universe!

The snippet of the article:

Against this dismal backdrop, capitulation has started for US equities. Technically, the charts had been signalling loss of momentum by the S&P500 from the August highs.

The irony of all this is that US equities - at the epicentre of the global financial markets crisis - have been relatively resilient compared with the emerging markets.

That extreme divergence between the losses in the US and emerging markets is unlikely to be sustained. In the emerging markets, Chinese stocks have seen the destruction of some 70 per cent of their value from their cyclical peak. Shanghai Composite was down 66 per cent as of Monday's close with losses mounting through the course of yesterday.

But it is too late to be selling. Warren Buffett famously urged investors to be 'fearful when others are greedy' and to be 'greedy when others are fearful'. There is now real fear in the markets. And while we are not tempted to be greedy just yet, we would caution against selling into what could be the final stages of capitulation.

A final word: stay disciplined and avoid following the herd. Nothing lasts forever - neither bull markets nor bear markets. Typically, fund flows into stock markets tend to be at their strongest when markets are peaking and deeply negative when markets are near their lowest points. This is what causes the common agony of the retail investor - the 'buy high/sell low' syndrome. Avoid running with the herd as it is jumping off the cliff.