Dow Breaks 10,000 Points!

Yes, that's the headline all over the world and one which I would also like to use today.

The Dow took a hit today, which could have ended up a lot worse, breaking the critical 10,000 points psychological support level, triggering automatic sell-offs all over the world. Investors were in all out panic today as they rush into safe haven investments such as Gold and Bonds. Bond yields dropped across the board significantly due to this sudden entry (see bond yield curve). Fear of a global recession have caused major markets all over the world to drop prior to the opening of the US market today, creating the extremely pressimistic opening we saw today. Options traders also rushed full force into put options as total equities put call ratio hit a high of 1.51.

In fact, here's a quote from a major news wire to demonstrate how out of control the US economy seems; "Some top economists seemed at a loss for ways to stop the downward spiral.".

What does all these sound to me? More Capitulation! :)

For one, the put call ratio hitting above 1.5 tells me that panic has been overdone. Since 2004, out of the 8 times the put call ratio have hit above 1.5, 4 times have the Dow rebound significantly within 2 weeks and only 2 times did it go lower and once did it go sideways. So, the odds remain favorable that this might be a capitulation which will stop this persistent decline. In fact, there are trading systems out there programmed to enter at such levels and might be why the Dow actually rebounded significantly near the end of the day. All 3 major indices also formed significant hammer candlestick signals. Hammers signals, occuring after a big and sustained decline usually spell a reversal if confirmed over the next few days. A couple of classic examples are the hammer signals on 22 Jan 2008 and 16 Aug 2007, both leading to significant gains.

Capitulation is now everywhere and is certainly time for shrewd investors to look for good mid to long term opportunities or to simply start a gradual long program on an ETF tracking the major indices.