Markets Still Helter Skelter, Seek Bottom

Was that the capitulation?

Many analysts believe the stock market won't shed its bear costume until it has one big cathartic selloff during which despair is at its fullest. Such moments have flagged bottoms in the past and set the stage for new bull markets.

Monday's stock selloff, followed by Merrill Lynch's Band-Aid-ripping CDO fire sale and Tuesday's rally, had that aroma. Then again, so did the Société Générale capitulation in January, when the market panicked due to a rogue French trader's mishap, the Bear Stearns capitulation in March and the Fannie Mae/Freddie Mac capitulation of mid-July.

A closely watched fear gauge, the Chicago Board Options Exchange's Volatility Index, jumped at each of those moments, hinting at capitulations. But it never hit levels associated with past market bottoms. At the end of previous bear markets, the VIX spiked to more than 35. It is now at 22. Maybe the market is still complacent about the risks that lie ahead. Or maybe it won't see the kind of capitulation analysts are counting on.

The VIX's history is too short to offer much confidence that every market bottom must be accompanied by a VIX above 35.

There are reasons to hope the end of this mess may be nearing. But banks are still faced with deteriorating credit quality, and the knock-on economic effects of tighter credit have only begun. The future path of the economy may trace something more like an L-shape than a V, meaning an easily spotted capitulation may never come.

"Will we see catharsis when everyone is waiting for it? It's doubtful the market will play along," said Wayne Kaufman, chief market analyst at John Thomas Financial.

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