What's Stopping The Final Capitulation?

In a word, NOTHING.

With Fed fund target rate already down to 1% and a huge stimulus package which the government can hardly fulfil fast enough already in place, there is little more the government or the Fed can do to prevent the final capitulation from happening when economic numbers continue to turn in rotten. Today's Empire State Index (see economic calendar) turned in way rotten as expected and with the economy newly in recession, it seems like it could get worse in the coming months. In fact, most economists are seeing the peak for unemployment rate at way above 7%, which means that the unemployment peak reversal is just not going to happen yet. On the bright side, with oil and commodities price this low, it only takes a slight increase in aggregate demand for production to step up big time under the low cost, bringing the economy back up quickly. It seems like production has indeed stepped up but don't expect the economy to come back up anytime within the next few months.

The final capitulation, or what the Fib guys call the 5th (final?) wave, is one last big leg down that I expect to happen before the market call a bottom. This process may take months to complete though. Why do I think so? Simply because I am still not seeing the kind of all out, extreme pessism that marks bottoms. Sure the market is pessimistic enough but with all that buying still taking place near the 8100 level, it is clear that not all the bulls are slaughtered yet.

The Dow is once again sitting right at the doorstep of the 8100 support zone, marking the southwards border of its intermediate neutral trend. Will it continue its intermediate neutral trend by turning up from here? With the big 552 points rally of last week completely given back, I am not that optimistic.


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