Game of Trades: We Are not Even Close to Real Bear Market Capitulation
There are a number of ways to determine how the market is being valued. One measure is to look at market breadth, specifically the allocation that investors have to the stock market.
That allocation peaked at over 70 percent last year, and has now aggressively declined to nearly 60 percent. That may be a sign that retail traders have gone elsewhere – possibly out of investment markets entirely.
But that gauge also shows that the speculation that goes with it is also gone. So last year’s frothy market has now come off of much of its excesses.
That’s the good news. But it’s not all good news. With a read of 60 percent, we’re back to usual bull market levels. But a bear market level sees a drop closer to 50 percent.
In some cases it may be even lower. In the latter half of the 2008-2009 market drop, investor breadth dopped to nearly 40 percent.
So we’re arguably only halfway to capitulation for retail investors at best. And typically in a bear market, most of the losses happen towards the end, not at the initial selloff.
Once that capitulation happens, markets are set up for a massive, multi-year rally. But investors could be in for some more pain until that happens. Ironically, if they give into that pain and sell off, they’ll help fuel the final drop that clears the stage for the next rally.