Two Technicals: 1. Why No Capitulation; 2. How Inflation Returns

RichardSchwartz — Wed, 16 Jul 2008 16:40:00 GMT

TECHNICAL VIEW. The Principle of History. Two historical technical observations today:

1. Capitulation: Where the Heck is It? CNBC keeps interviewing floor traders and reporting from the New York Stock Exchange that everyone there is anxiously looking for that big bout of capitulation, selling, to end this latest market decline. But their wishes aren’t coming true. Guess they haven’t read my stock market letter as a study of the price action after the Bank Panic of 1907 , the most similar comparison to today’s credit crisis I could find, showed no capitulation back then. The reason and explanation was that since investors were so darn bearish, they shorted any and all rallies and thus stocks never got “quite out of hand” or saw that one day of massive selling or capitulation today’s traders want to see. Schwartz View: Similar to market crashes, we have to get blindsided to get capitulation. Or the problems and pressures have to get extremely severe with no light at the end of the tunnel. Today, we sure aren’t getting blindsided and numerous remedies are being floated and tried left and right, like economic stimulus packages, Fed rate cuts, Treasury announcements, yesterday’s SEC pronouncement about short selling, etc. Again, let me point out, it’s sort of ironic that we all preach free market capitalism when times are good but when times turn bad, we all scream for the government to bail us out.

2. The Return of Inflation. This commodity inflation -- rising prices in metals, oil and now food -- is the first bout of rising inflation we’ve seen since the early 1980s when then Fed chair Paul Volker jacked interest rates up through the roof and led the US into recession but in so doing also broke the back of multi-decade, out of control inflation. As my regular readers know, widely-followed big picture guru Jim Rogers says commodities are going to keep running up in price for approximately the next ten years, that a commodity bull market is in full force. And I don’t disagree. But let me add my alpha to the picture. My studies have shown that many, maybe most times, when any new trend begins it begins with a big burst. Then we get a large pullback in the early states of this new trend (whatever the time frame the new trend is, days, weeks, years, decades). Then after this large pullback, say because there remains many disbelievers who can’t quite believe things have changed, or because these quick gains need to be consolidated, or because the trend is moving too fast and has outrun itself, the new trend becomes more steady and reliable. Check back to the bull market which started in 1982, this pattern applies. Or think a bit about this new bear market. How stocks dropped last year in July and August when the subprime news first broke and then had a big bounce (to slight new highs) before the new down trend reasserted itself. Schwartz View: So it makes sense that inflation and this commodity bull are due for a big correction downward before reasserting themselves for the next few years.

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Two Technicals: 1. Why No Capitulation; 2. How Inflation Returns