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American Capital Agency Corp. Message Board

  • reits_r_us reits_r_us May 18, 2012 11:22 PM Flag

    A "Tell" on Capitulation

    Hi everybody,

    I've been beating this drum for almost two months, since DOW 13,300, re. the sell off in the general market. AGNC and MTGE are resilient and should fare among the best,in a general market decline. NLY and the others, less well. Just another reason to stay with the best mReits.

    I have mentioned trades I placed this past week, including the Bear Put Spreads on the SPY Dec146/145's, together with the Bull Call Spreads on the VXX, Dec and 13Jan contracts. I esp. liked the premium on the Jan 11/21's for around 5.22. The VXX doesn't have to budge from today, and it's a double.

    Of course, you can lose the 5.22, in it's entirety, if the VXX is below 11 at 13Jan OPEX.

    I've been asked, by some folks, when we might see this decline? It often is subtle, like the almost 1000 point drop in the last 18 days, in the DOW. The general market has a lot of back and forth. The Bulls piling in to get their fills at the lows and the Bears continuing to sell and short as they see a future decline. I have tried to evaluate the patterns( forgive me Taleb...Observable Black Swans are not subtle), but there often occur some warning signs of imminent capitulation.

    If this link works, you will see a rather drastic decline of about 3300 points on the DOW, over this slice of history, of 3 months, from Aug-Nov, 2008. The thing that I have observed over about 3-5 major corrections, is the larger and larger intra-day, and inter-day fluctuations in PPS as the market approaches capitulation. Capitulation, being that time period when one side(Bulls/Bears) are exhausted, pooped, caput, and quit buying/selling..(usu. referred to in a Bear market), to hold up the PPS.

    So observe the last few weeks in Sept as the back and forth is rather breath taking... 300, 400, 500, and finally Sept 29th with almost a 900 point intra-day variance. In fact, I don't think there are many days with less than a 400 point difference in all of Sept, 2008.

    I know you might say, well that was merely a more volatile time, yes, that's true, and my point. Look at this entire year...just do it...that's right Jan 1 until today. I haven't looked real closely, but I bet you won't find more than half a dozen days, yes, 6 days( I bet less) , from the whole year of 2012, that have more than a 250 point intra-day variance.

    So are we in for a major correction, right now, no(IMO). What do you look for? Larger and larger intra-day swings, with lower PPS, heading toward capitulation. I think we'll see it by end of year. Hence the trade examples I gave.

    I wish you all success and happiness. Trade well,


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    • So the days in March, April and May, with a 200 point variance or greater, between high and low were:

      March:3 days(6th,13th and 28th)
      April: 5 days(4,10,12,17,23rd)
      May: 10(1,8,9,15,16,17,18,21,23,30)

      Notice a pattern!

      May 8th was the last day the DOW was in the 1300's. Note the increase in number of days sited(increased frequency of days with >200 variance), since we left 1300 behind, on that date.

      Watch now, for increasing frequency of days with 225-250 variance as the slide continues, or conversely, the decrease in variance as we go back to 1300 DOW.

      Pretty fascinating... you gotta love the numbers...;-)


      • 1 Reply to reits_r_us
      • Back in May 2008 the dow was also in the 13000's, so the same values in variance probably apply.

        Now we pay attention to interval between days to look for average shortening or lengthening. The last interval is seven, with one light day of trading coupled with a three day no trade period. Thinking that the seven interval can be disregarded.

        Naturally optimistic humans want the markets to move up, but they are fighting their sense of reality too. So one day they have a party and rally and roister, followed by correction, then overcorrection...then opportunity to buy followed by exhuberance followed by correction... Like molecules in pot flying around as it nears boiling point.

    • <When I make a word do a lot of work like that," said Humpty Dumpty, "I always pay it extra." >

      Thanks for the chuckle.

    • "Look for 2.5-3x the variance after a current top in the variance to "tell" a major turn."

      Sounds like something that needs some detailed back-testing -- to confirm both its sensitivity and its specificity, as you Docs like to say :)

      As for "capitulation", I thought it applied after a market slide, but hey, it's a word, you can use it any way you want as long as you follow the Humpty Dumpty Rule:

      "When I make a word do a lot of work like that," said Humpty Dumpty, "I always pay it extra."

    • I also believe we are in a bear market and look for a grinding decline followed by one or two violent falls by year end.
      Low p/e and high divy stocks, bonds & bond funds offer the best protection.JMO

    • Hi Ephort,

      Have to run but,

      Look for 2.5-3x the variance after a current top in the variance to "tell" a major turn.

      Capitulation, I use to denote exhaustion, at the top from the Bulls and at the bottom from the Bears. Make sense?


    • EVEP is a broken stock, overvalued and its going down to mid 40s.There are better plays than that one like EPD or LINE. Personaly I am buying WHZ under 20.JMO

    • The left scale corresponds to the index, and the right scale corresponds to the red histogram (showing intra-day high-low as % of close).

    • Doc, I'm back, a little tired, but I read your comments and did a little homework. Here's how I see it:

      - It's true, there is increased volatility at market reversals (tops and bottoms as well).

      - But there is also increased volatility at other times, for example at minor pullbacks, when the price quickly corrects and keeps going up.

      - So the question is, what should be the exact rule for calling a major market top as opposed to a minor correction?

      - Need a trminology clarification: I understand "capitulation" to be a late phase of a market (or stock) major drop. I think that's how you used it in your original post, and also in reference to EVEP. But elsewhere in these comments, I *think* you are calling capitulation the top -- perhaps I misunderstood you.

      Anyway -- I made a quick chart of the NASDAQ from March 2009 to April 2012. Here the index (blue line) grows from ~1,400 to ~3,000. The superimposed red histogram shows (high-low) as percent of close for each day in this time period. This quantity (analogous to your "IV") increases any time there is a correction, and it seems to me one (you?) would have to come up with an exact rule for when to exit and when to re-enter -- because you wouldn't have wanted to sit out this rise of the NASDAQ because of a few corrections here and there.

      I uploaded the chart to a temp storage site -- let's see if this link works:

    • Sorry, I am absorbed in a "Tell" of capitulation that is currently unfolding before our eyes....EVEP.

      It had its EX May 4th and after that date you will note the IV has averaged 1.50, until May 15th, last Tuesday. Now look at the increasing IV since the 15th, doubling to 3.00 avg. Look at the volume, each subsequent day of last week ,paired with the IV, then paired with the decline in PPS.

      You will not get a clearer snapshot of capitulation in a Bear move. There might be a number of legs down, but this leg "should" end when the volume shrinks back to the 300's and then increasing volume as the Bulls come in. This will be coupled with decreasing IV and increasing PPS. Kind of like watching football...;-)

      I am closely watching Leap short Puts. The 50 Calls are still pretty pricey.

      What strategies would you employ with EVEP Slegermark? I know Peter is watching. Hey, Peter, what do you think?


    • Enjoy your time Ephort and hurry back, I need you buddy...there's a game afoot....;-)


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