Market Insider: Praying For Capitulation

It may be that this is part of the final blow out, the last exhausting painful blast of selling where the stock market finally bangs down on what we later point to as the bottom.

That's what traders are saying (and praying).

It's hard to trust that because we've heard it before in this beastly bear market. This time though it really does feel different. Even the old guys (and gals) are saying this is the worst thing they've ever seen. The pros are fearful, and global markets have joined together in an ugly downward spiral.

It feels cathartically terrible, and that's a good sign. It may actually mean the market is getting close to capitulation. Think of capitulation as the clichéd "darkest before the dawn." It's the event traders have been looking for, but that doesn't mean this is the end of it.

When the markets capitulate, you will feel like never investing another dime (maybe you feel that now). But to traders, that's the moment when they believe it will be safe to start thinking about buying again. The only logic driving the market now is a frightened, forced selling that makes valuations meaningless. But what kind of stock market we will have after this cathartic wipeout is unclear.

The markets also have to overcome the hurdle of frozen credit markets, and banks have to start showing confidence that the boatloads of money central bankers are throwing at them will fix the banking system. The G-7 meets in Washington Friday, and investors are watching the Fed, Treasury and the G-7 finance ministers for any new act aimed at unlocking markets.

The Dow declined 7.3 percent to 8579 Thursday, giving it a 21 percent decline in the past seven sessions. The market is now down 40 percent, year-to-date coincidentally, from its all-time high. The S&P dropped 75, or 7.6 percent at 909. Leading the decline were financial stocks, off 11.7 percent, and energy stocks, down 11.4 percent.

On Friday, traders expected a messy open for Friday as they went home Thursday night. Asian markets were cascading to multi-year lows with Japan dipping at one point to a double-digit loss. Some expect a morning washout and then the possibility of a turn later in the day, but that's just one scenario and it doesn't mean there won't be more selling next week.

Jim Paulsen of Wells Capital Management said he believes Thursday's action signaled the beginning of the move toward the bottom, but one thing the markets need is confidence. The government, he says, has probably done enough to fix the credit crunch.

"The first day that this stock market falls and then recovers without any government intervention that will be the beginning and end of the crisis. We've to got to let this thing burn itself out on its own and then confidence will build. I think the only think they haven't done is work on the central issue-- we don't have fundamental issues. We need to have confidence. They need to look confident," he said.