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Capitulation Signals Markets are Bottoming

On Tuesday 2nd August, a 'Sell' signal on the US equity market was given by the technical indicator 'Dow Theory' that I keep an eye on.

But these are confusing times and today (Monday 8th August) we have evidence of full 'Capitulation' (a selling climax) and none more so than in the European markets. I enclose an updated version of the Chart of the Euro Stoxx 50 Index which I posted last weekend. Following today's market action, the index is now 20% below its 30-week moving average, a very unusual situation and one that normally precedes a recovery in markets.

Euro Stoxx 50 - Capitulation 12.08.2011

As the chart shows, since 1970, or in the last forty-one years, the Euro Stoxx 50 Index has declined 20% below the 30-week moving average on only a handful of occasions. It is a sign of investor panic. With the Euro Stoxx 50 Index ETF yielding over 5%, value is on offer. Short term interest rates are 1.5% and German 10-year bonds are circa 2.3%.

At the very least, subscribers should not be panicked into selling here. Those with cash waiting for an opportunity to invest should consider doing so over the next few days. Value is never a precise timing tool but good value along with 'Capitulation' suggests one should consider moving against the crowd at this stage. Indicators that have provided a good sign post in the past are our best guide.

Rory Gillen
13th August 2011