We are finally going to see capitulation ... something the market, Wall Street, and the pit traders have been waiting for.
Extreme capitulation occurs in a progression where investors move from optimism & denial to fear, fear to panic, and then panic to despair. We should now see the despair stage where investors try to bail out at any costs.
This will cause more forced redemptions on Hedge Funds and Mutual Funds. The current accelerated process could last for 3 days before the selling is exhausted.
At the same time, credit default swaps and highly leveraged positions are being unwound. This all adds to the panic level and it squeezes the liquidity out of the markets. Peak liquidation levels are likely to occur between today and Tuesday.
The market has tried to establish a few rallies in the past days but has not been able to hold on to any of them. Part of the reason for this is that there has been substantial selling pressure from hedge funds facing redemptions. Until that pressure dissipates, the markets will not be able to find a rally that holds for any amount of time.
It is going to take time for all of the economic problems to unwind and resolve themselves. Leveraged investments have to be unwound. Liquidity has to start flowing again, and banks have to start lending (Currently, 1 in 4 new car buyers with excellent credit are being refused a loan). Central banks have to act more aggressively and get the liquidity to flow again ... they are trying to do that now.
Meanwhile, the stock market discounts recessions and the future in the present. As that happens, fear and panic selling causes the market to overshoot how far down it should go. That gets compensated with up moves that brings the stock market closer to a real fair value ... so rallies have not gone away forever. They will be back ... and we are likely to see some pretty good ones after extreme oversold conditions.
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