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Free Falling

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When will the bottom be in? John Hussman of Hussman Funds (www.hussmanfunds.com) offered a prediction. In an August 5, 2008 article, Hussman predicted that markets will near their bottoms only when we again start hearing the phrase "free fall" spoken with some regularity.

Others, including Art Cashin when appearing on CNBC, mention the need for capitulation. When one types in the word "capitulation" on the Investopedia.com site, other phrases such as "bloodletting," "panic selling," "falling knife," and "losing your shirt" come up, too. A definition becomes almost superfluous after such evocative synonyms.

"True capitulation," Investopedia says, "is accompanied by sharp declines, extremely high volume and panic selling." In "Panic Selling--Capitulation or Crash," Rick Wayman characterizes capitulation as a painful selling frenzy that is at least mercifully quick. During a capitulation, almost no one wants stock, he says.

An extreme example of capitulation occurred in October, 1987, of course, when the Dow lost 508.32 points or 22.6 percent in a single day. The selling frenzy was so intense that the NYSE's computer system was overwhelmed and people sold without knowing the prices at which they were selling. They just wanted out, at whatever price they could get out. Fear took over and investors reacted. While the percentage loss in a single day was unique, that "get me out at any cost" feeling wasn't. That's typical of capitulation.

Martin Pring, writing in TECHNICAL ANALYSIS EXPLAINED, likely would use the term "selling climax" to encompass both ideas: free fall and capitulation (p. 272). Prices fall at an accelerated rate, he says, bringing in the idea of a free fall, with the selling climax accomplished on big volume. In MASTER THE MARKETS, Tom William's explanation of a selling climax echoes Pring's, also encompassing the ideas of a period of free falling prices followed by capitulation. Selling will have occurred "day after day, week after week," he says (p.70). Finally, some level will be reached at which weak holders can no longer endure the losses, and that level, perhaps helped by a catalyst such as bad news, will trigger "the herd" to dump stocks at any price.

Not all bottoming processes require capitulation, and we can have sneaky bottoming process that result in bulls being the ones in the frenzy, this time to buy. However, when Art Cashin, John Hussman and people of their ilk worry, I worry along with them. As the historically worst period for equity markets approaches, I'm listening for that "free fall" phrase to be used more frequently before I believe too strongly that a bottom has been put in.

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