Oh the humanity.

That's what I've been thinking all this week as the markets have gone down in a fiery crash for six straight sessions.  And like you - no doubt - I have found it all to be deeply disturbing.  

Unfortunately, that's exactly what happens when the markets sell off so indiscriminately. In the blink of an eye, the best laid plans are turned to dust and traders get turned into trapped longs.

That's exactly where we find ourselves yet again this week as the "bailout/rescue rally" exploded while trying to land. This week alone, the Dow has lost 1,067 points, or 10.3 percent, while over the last six sessions It has lost 1,592.56, or 14.68 percent.

That put the blue chip average down about 35% for the year. Ouch.

Of course, it is in exactly times like these that traders start to look for signs of stock market capitulation as a signal marking the ever-elusive bottom.

In fact, it is that point where the real money is made even if it gets its name from a general's worst nightmare—surrender.

What is Stock Market Capitulation?

However, for the stock markets, this type of capitulation is more associated with routs as investors "give up" on stocks entirely and move into less risky investments. Its hallmark is panic selling on big volumes as that same crowd heads for the exits.

And while it is usually brief and somewhat terrifying, true capitulation often means that the sell off has finally run its course, and prices begin to feel for the bottom.

The belief is that during this sequence everyone who wanted to get out of a stock has done so. That includes those who were forced to sell due to margin calls.  And since almost everyone who wanted (or was forced) to get out of a stock has done so, only buyers are left, pushing prices higher.

And as scary as it has been lately, that's a big part of what we have witnessed this week as fund redemptions have only accelerated.

Of course, it was just last week that we noted - according to TrimTabs Investment Research - that the latest round of turmoil has sent $41 billion in equity mutual funds and $24 billion in bond funds to the sidelines in September.  That put September's withdraws at the top of the all time list tripling the previous record set in 2001.

Now if that's not a stampede to cash I don't know what one is. But is it a sign of capitulation?  Possibly.

Either way, in the meantime, what we've been treated to over the last four weeks has definitely been enough to push the markets towards that moment. After all, when the vix indicator nearly hits 60, fear reigns supreme.

Capitulation, then, should not be far behind. Sixty on the VIX is simply off the charts.

Fear and Capitulation Go Hand in Hand

In fact, the recent levels of market fear have been so great lately that they have given me a whole new appreciation of that famous Depression-era quote by FDR himself.

You may remember it.

In his first inaugural address Roosevelt famously thundered, "The only thing we have to fear is fear itself." 

And while I've heard that phrase more than 100 times, the events of the last four weeks have given the spirit of the moment a whole new clarity, as if I had heard it for the very first time.  

Yet when fear runs this rampant - as it did then - the market opens up to new opportunities as everyone else throws in the towel. Fear and capitulation then go hand-in-hand.

As for the rest of Roosevelt's speech on that bleak day, it's well worth the read, because let's face it there really is nothing new under the sun. This has been a well worn path.

In fact, to that end I would ask that you consider this passage from a day long gone by. I discovered it in a recent speech by my favorite central banker, Richard W. Fisher.

It reads:

"Every now and then the world is visited by one of these delusive seasons, when ‘the credit system' ...expands to full luxuriance: everybody trusts everybody; a bad debt is a thing unheard of; the broad way to certain and sudden wealth lies plain and open; and men are tempted to dash forward boldly from the facility of borrowing.

"Promissory notes, interchanged between scheming individuals, are liberally discounted at the banks... Every one now talks in [bodacious amounts]; nothing is heard but gigantic operations in trade; great purchases and sales of real property, and immense sums [are] made at every transfer. All, to be sure, as yet exists in promise; but the believer in promises calculates the aggregate as solid capital...

"Now is the time for speculative and dreaming or designing men. They relate their dreams and projects to the ignorant and credulous, dazzle them with golden visions, and set them maddening after shadows. The example of one stimulates another; speculation rises on speculation; bubble rises on bubble; every one helps... to swell the windy superstructure...

"Speculation is the romance of trade, and casts contempt upon all its sober realities. It renders the [financier] a magician, and the Exchange a region of enchantment.... No ‘operation' is thought worthy of attention that does not double or treble the investment. No business is worth following that does not promise an immediate fortune... The subterranean garden of Aladdin is nothing to the realms of wealth that break upon [the] imagination.

"Could this delusion always last, ...life ...would indeed be a golden dream; but it is as short as it is brilliant."

Now that wasn't written by either Fisher or Roosevelt, but by Washington Irving.  

He was talking about the "Mississippi Bubble" fiasco of 1719. And even though it was penned almost 300 years ago it reads like it could have been written yesterday. Such is the human conditon.

So here's what I'd like you to take away from it all as we continue to look for that magical moment of capitulation: We've been in these jams many times before and they always manage find a bottom.

That's where savvy investors end up make a killing in the markets if only they can get past thier fears.

That, in essence, is what buying low and selling high is all about.

By the way, here's another passage from Fisher's speech that I couldn't agree with more.

He calls it "Old Doc Nadler's Remedy". It was delivered after the Crash of 1929.

It reads:

• "You're right if you bet that the United States economy will continue to expand;
• "You're wrong if you bet that it is going to stand still or collapse;
• "You're wrong if you bet that any one element in our society is going to ruin or wreck the country;
• "You're right if you bet that men in business, labor, and government are sane, reasonably well informed and decent people who can be counted on to find common ground among all their conflicting interests and work out a compromise solution to the big issues that confront them."

And that I guess is what all of us are really waiting for - reasonable men to put together a solution. 

I just wish that they would hurry up.

Your bargain-hunting analyst,

Steve Christ, Investment Director

The Wealth Advisory