Dear Tom,
Tom Mazanec wrote:
> I just don't "grok" this "capitulation" thing. When people give up
> hope, you would think the market would REALLY fall. Or am I
> misunderstanding something?
The "capitulation" concept is a complete misreading of what happened
in 1987, in what I call the "False Panic of 1987."
To understand it, begin by looking closely at the following table:
Date DJIA (Change) (% of trend) (% of 1987 high)
----------------- -------------- ---------------- ----------------
Tue 1987-08-25 2722.42( +0.94%) (128% of 2113.6) (100% of 87-08-25)
Wed 1987-08-26 2701.85( -0.76%) (127% of 2113.9) ( 99% of 87-08-25)
Thu 1987-08-27 2675.06( -0.99%) (126% of 2114.2) ( 98% of 87-08-25)
Fri 1987-08-28 2639.35( -1.33%) (124% of 2114.4) ( 96% of 87-08-25)
---------------------------------------------------------------------
Mon 1987-08-31 2662.95( +0.89%) (125% of 2115.2) ( 97% of 87-08-25)
Tue 1987-09-01 2610.97( -1.95%) (123% of 2115.5) ( 95% of 87-08-25)
Wed 1987-09-02 2602.04( -0.34%) (122% of 2115.8) ( 95% of 87-08-25)
Thu 1987-09-03 2599.49( -0.10%) (122% of 2116.0) ( 95% of 87-08-25)
Fri 1987-09-04 2561.38( -1.47%) (121% of 2116.3) ( 94% of 87-08-25)
---------------------------------------------------------------------
Tue 1987-09-08 2545.12( -0.63%) (120% of 2117.3) ( 93% of 87-08-25)
Wed 1987-09-09 2549.27( +0.16%) (120% of 2117.6) ( 93% of 87-08-25)
Thu 1987-09-10 2576.05( +1.05%) (121% of 2117.9) ( 94% of 87-08-25)
Fri 1987-09-11 2608.74( +1.27%) (123% of 2118.1) ( 95% of 87-08-25)
---------------------------------------------------------------------
Mon 1987-09-14 2613.04( +0.16%) (123% of 2118.9) ( 95% of 87-08-25)
Tue 1987-09-15 2566.58( -1.78%) (121% of 2119.2) ( 94% of 87-08-25)
Wed 1987-09-16 2530.19( -1.42%) (119% of 2119.5) ( 92% of 87-08-25)
Thu 1987-09-17 2527.90( -0.09%) (119% of 2119.7) ( 92% of 87-08-25)
Fri 1987-09-18 2524.64( -0.13%) (119% of 2120.0) ( 92% of 87-08-25)
---------------------------------------------------------------------
Mon 1987-09-21 2492.82( -1.26%) (117% of 2120.8) ( 91% of 87-08-25)
Tue 1987-09-22 2568.05( +3.02%) (121% of 2121.1) ( 94% of 87-08-25)
Wed 1987-09-23 2585.67( +0.69%) (121% of 2121.3) ( 94% of 87-08-25)
Thu 1987-09-24 2566.42( -0.74%) (120% of 2121.6) ( 94% of 87-08-25)
Fri 1987-09-25 2570.17( +0.15%) (121% of 2121.9) ( 94% of 87-08-25)
---------------------------------------------------------------------
Mon 1987-09-28 2601.50( +1.22%) (122% of 2122.7) ( 95% of 87-08-25)
Tue 1987-09-29 2590.57( -0.42%) (122% of 2122.9) ( 95% of 87-08-25)
Wed 1987-09-30 2596.28( +0.22%) (122% of 2123.2) ( 95% of 87-08-25)
Thu 1987-10-01 2639.20( +1.65%) (124% of 2123.5) ( 96% of 87-08-25)
Fri 1987-10-02 2640.99( +0.07%) (124% of 2123.7) ( 97% of 87-08-25)
---------------------------------------------------------------------
Mon 1987-10-05 2640.18( -0.03%) (124% of 2124.5) ( 96% of 87-08-25)
Tue 1987-10-06 2548.63( -3.47%) (119% of 2124.8) ( 93% of 87-08-25)
Wed 1987-10-07 2551.08( +0.10%) (120% of 2125.1) ( 93% of 87-08-25)
Thu 1987-10-08 2516.64( -1.35%) (118% of 2125.3) ( 92% of 87-08-25)
Fri 1987-10-09 2482.21( -1.37%) (116% of 2125.6) ( 91% of 87-08-25)
---------------------------------------------------------------------
Mon 1987-10-12 2471.44( -0.43%) (116% of 2126.4) ( 90% of 87-08-25)
Tue 1987-10-13 2508.16( +1.49%) (117% of 2126.6) ( 92% of 87-08-25)
Wed 1987-10-14 2412.70( -3.81%) (113% of 2126.9) ( 88% of 87-08-25)
Thu 1987-10-15 2355.09( -2.39%) (110% of 2127.2) ( 86% of 87-08-25)
Fri 1987-10-16 2246.73( -4.60%) (105% of 2127.4) ( 82% of 87-08-25)
---------------------------------------------------------------------
** Great Depression and Dow Jones Industrial Average
** http://www.generationaldynamics.com/cgi ... 010.i.djia
As you can see, on August 25, 1987, the Dow was at 2722, the high for
the year. At that point it started falling at the rate of a point or
two every day, and then on Friday, Oct 16, it fell 4.6%.
I actually have a personal memory of that weekend. The market had
fallen roughly from 2500 on Tuesday to 2200 on Friday, and it was
being discussed on tv. My memory is of an old guy (who I now realize
must have been around 5-10 years old in 1929) saying the following:
"The market may fall a little more, but the next 300 point move will
be in an upward direction."
Then on Monday, October 19, the market fell 500 points, or 22.6%, to
around 1700.
Now you can imagine the psychology at the time. The people in charge
were survivors of the 1929 crash. As I've described in conjunction
with the "58-year hypothesis," these are people 63+ years old who
realize that (1) the pattern from 25-Aug to to 19-Oct-1987 was almost
identical to the pattern 3-Sept to 28-Oct-1929. These people would
recognize the similarity, but younger people would be almost entirely
oblivious to it.
I discussed the 58-year hypothesis in these articles:
** The Iraq war may be related to the bombing of Hiroshima and Nagasaki.
** http://www.generationaldynamics.com/cgi ... 17#e080217
** Investors commemorate the false panic of Monday, October 19, 1987
** http://www.generationaldynamics.com/cgi ... 19#e071019
The Boomers and Generation-Xers, who are now running things, learned
completely different lessons from what happened in 1987.
- They learned there was no longer any danger of a stock market
crash, because the Fed could stop any crash at any time by injecting
liquidity into the banking system. (This worked fine in 1987, but
the same strategy has failed miserably under Ben Bernanke's Fed since
the credit crunch began in 2007.)
- They learned that when everyone "capitulates," as they did on
October 28, 1987, then the market has reached a bottom, and starts
going up again.
In other words, the pundits and investors believe that when we have
another day like October 28, 1987, a "capitulation," then the market
will have truly reached bottom, and will start going up again.
Those who believe in capitulation are missing two very big
points:
So it's good to understand that even people who disagree with me
about a coming stock market crash still agree that "something" is
going to happen -- something like the 22% plunge that happened on
28-Oct-1987. And this is important -- mainstream investors agree
with me that this is what's going to happen. (Among those who
believe in the capitulation=bottom concept, most would disagree with
Gordo, who apparently holds the view that the capitulation event has
already happened. That would have to be considered wishful thinking,
even among those people who believe that capitulation = market
bottom.)
So mainstream investors agree with me that some kind of panic event
is going to occur. Where we differ is what happens afterwards.
- Mainstream investors believe that the market will bottom out at
that point, just as happened in 1987. To see that this belief is
silly, just understand that they believe that the stupid Boomers and
nihilistic Gen-Xers will act today just like the sensible Silents did
in 1987. That assumption is ridiculous on its face.
- Generational Dynamics predicts that the market will continue to
fall for several years.
Sincerely,
John
John J. Xenakis
E-mail:
john@GenerationalDynamics.com
Web site:
http://www.GenerationalDynamics.com
Forum:
http://www.GenerationalDynamics.com/forum