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A Cluster of Capitulations

Technical observations of

Bob Hoye
Institutional Advisors
Dec 11, 2008

Extracted from Chartworks of Dec 8, 2008

The stock market replicated the 1929 crash with remarkable fidelity. That is, by percentage declines as well as by the timing of the panics and rebounds. Our historical reviews had noted that the 1929 crash followed the 1873 example, and that that one had, for example, had much in common with the crash following the 1720 South Sea Bubble.

Such disasters are not limited to stock markets, but encompass commodities, corporate bonds and innovative credit. Massive liquidation of suddenly unsupportable positions has virtually been completed and our Capitulation Model provides a clinical way of determining the next opportunity. The following important series are generating Downside Capitulations of varying degrees. A tradable rebound well into the first quarter has been expected, and the combination of these readings, seasonal influences and the technical pattern for gold suggests next week could see some significant reversals.

Crude oil has progressed further in its panic selling to the point that we are experiencing simultaneous daily, weekly and monthly capitulation alerts. This is the first such instance since 1933. Such a sign of urgency in selling suggests that an upside reversal is imminent. The XOI index continues to exhibit bullish divergence verses crude oil. As noted on November 28th, the eventual upside reversal will likely produce enough of an initial rally to generate a daily RSI(14) reading of 60. This could occur by mid-January. For short term traders this will become a selling opportunity with a chance to repurchase on a subsequent pullback.

The CRB Index has combined daily and weekly capitulations. Purchases here in the DBC or GSG commodity ETF indices, risking 2% below Friday's close could capture a good retracement rally back to the 20-week moving averages.

Gold has completed enough days on the downside from the November high to warrant the beginning of a seasonal rally.

Equities. Daily and weekly capitulations were present on October 9th & 10th and prices are now breaking out of a base. Our initial target in the S&P 500 is 1045, with a higher target of 1090 in the first quarter of 2009. We are entering the period where US small cap stocks are anticipated to outperform large caps on the upside through early in January. Considering that the large caps (S&P 500) appear to have bottomed, the small call caps (Russell 2000) should do quite well. Our annual report on the 'Turn of the Year' trade will be sent out soon. The IWM and TNA provide a means of participating in small caps.

Bonds. Daily readings on the 20 and 30-year bonds are now into an upside exhaustion phase.

Dec 8, 2008
Institutional Advisors

Hoye Archives

The opinions in this report are solely those of the author. The information herein was obtained from various sources; however we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.

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