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Falling Knives
Although a
chilling metaphor, its equivalent for senior stocks and senior indexes can
be turned to advantage.
Our view has been that if valuations were rationalized on the way up
the mania, they would be of little consequence in determining buying
levels on the way down. Instead, measurable market dynamics common to
previous forced liquidations would likely be the key.
As the tone of the financial markets changed in October, 2000, the term
"capitulation" became widely but prematurely used.
Appropriate research developed by the ChartWorks has provided a
methodical discipline for the eventual buying opportunities as each of a
series of liquidity crises culminate.
Method:
One of the ironies of the
investment business is that no matter how dramatic, shocking, or costly a
big reversal is, within a week there is no one who didn't make the
call.
In recognizing the professional hazards of being too early or too late
or complacent on extreme moves, the Model clinically reads the dynamics of
dramatic change. This greatly assists equity investing or trading in an
increasingly volatile financial world.
Developed by the ChartWorks over many years, the capitulation model is
successful in determining upside Capitulation at the end of a great
speculation as well as at the consequent downside Capitulations.
Capitulation:
The "Buy"
is disciplined by the sequential completion of three steps:
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Recognition of the downside exhaustion
condition, which can take up to a few weeks.
-
Recognition of diminished selling
pressures and a proven test of demand at the low.
-
The "Buy" is signaled by an
upside reversal in demand and price. At this point, the risk/reward
ratio is optimized.
Exhaustion:
Often a persistent
decline will produce only a minor exhaustion reading. When this occurs
with a positive divergence in the Demand Index, a tradable rally is
possible.
Double:
This additional parameter
does not occur with every high or low reading; but when it clicks in, it
is usually within a few trading days of the turnaround.
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