The Ten Secrets Of Epic Capitulation Riches

The Ten Secrets Of Epic Capitulation Riches

This is a computer-generated transcript and may contain errors.  Please listen to the audio version of the podcast for clarification of any errors. Please also understand that the natural flow of a podcast is very different from a grammatically correct written report.

Dr. Natasha Arora [00:01]

Hello friends, I am Dr. Natasha Arora. Correctly identifying a capitulation is not easy. However, if you can correctly identify capitulations, you can easily generate significant profits. Fortunately, we have the master himself with us today. Nigam has correctly identified every capitulation this century. He has uncovered secrets that are generally unknown. Nigam, let’s start with what is a capitulation?

Nigam Arora [00:35]

In the stock market, a capitulation occurs when almost everybody who’s going to sell at that time has actually sold. Similar capitulations occur in other markets, such as gold and silver and oil and products and other commodities.

Dr. Natasha Arora [00:57]

Why is identifying a capitulation important?

Nigam Arora [01:03]

A capitulation often coincides with the bottom. The concept is that when almost everybody who’s going to sell at that time has already sold, the market cannot go down anymore at that time.

Dr. Natasha Arora [01:28]

Now, I heard you emphasize at that time, can you explain?

Nigam Arora [01:35]

Sure, the markets are dynamic, stock market is dynamic, oil market is dynamic, forex markets are dynamic, and so on. There are always a lot of crosscurrents, there are new buyers, there are new sellers. So, it’s really a reference point in time at that time. Now, typically what happens is when everybody’s going to sell at that time has already sold, the slightest bit of good news in the market shoots up.

Now that is true of the history of the market, irrespective of which market it is. In the stock market, depending on what period you are in, there’s another factor and that is FOMO (fear of missing out), right? And I’ve seen that in the gold market, I’ve seen that in the oil market too, but if you are in a period which is following a period where there was a prolonged bull market where every dip could have been bought, and again it’s not only the stock market, this is in forex, this is in oil, this is in gold.

People rush in because they don’t miss and then often they end up losing money because market goes up a little bit and then it goes to a new low. So the reference point is important, and there are different kind of capitulations and so on.

Dr. Natasha Arora [03:10]

As you mentioned there are different types. We have epic capitulations. There are also major capitulations, minor capitulations, and micro capitulations. For this podcast, we are going to focus on epic capitulations. We’ll plan future podcasts to cover the other forms and how you can generate significant profits from them as well. Being able to identify an epic capitulation is a big deal because the follow up profits can be huge, isn’t that correct?

Nigam Arora [03:45]

Yes that is correct. If you can identify an epic capitulation you can generate very significant profits.

Dr. Natasha Arora [03:57]

Professionals, as well as many retail investors, understand the concept of capitulation. To date, I’m not aware of anybody other than you who has succeeded at calling epic capitulations correctly. Obviously, you have some secrets.

Nigam Arora [04:14]

Well, I think I’ve uncovered some secrets that I’m happy to share with our friends here. As you know Natasha and our friends you know, I’m very analytical. I tend to study things deeply and based on the rigorous analysis of past capitulations I figured out some secrets. But stock market is difficult. Other markets are also difficult. They’re not easy. Then I lived through several capitulations when I thought I had figured them out it, came close to calling them correctly but not perfectly.

Obviously, I had not perfected the art, but as I went through those real time experiences with real money, I learned a lot, and as you learn more, you get good at it. So through that real time learning with real money, I was able to learn lessons that were needed to fill the gaps in my knowledge that I had gained through deep study, and these gaps could have not been filled in my knowledge without experience. They could have not been done by study alone.

Dr. Natasha Arora [05:41]

That is well said. Some things you can only learn through experience, but you were prepared for those experiences to teach you what you need to know.

Nigam Arora [05:51]

Well, that’s very correct, Natasha. You have to be able to receive what you’ve been taught. You have to know enough to grasp what’s happening and observe it properly to learn and that’s exactly what I was able to do.

Dr. Natasha Arora [06:10]

Let’s start with what is generally known and that is volume going higher during a capitulation. All volume is not the same though. Can you share with us the secret of volume that is not generally known?

Nigam Arora [06:29]

You said that perfectly Natasha. It’s well known volume goes higher during capitulation. But all volume is not the same. So typically people look at the volume on the day, the day after capitulation and there is merit to that obviously and I do the same thing. I look at if this is heavy volume or lower volume and so on. But you have to look at within the volume right.

So for example you could have had a not a heavy volume during part of the day and then some news came along and that caused a heavy volume and then the volume dwindled. So in that particular case even though if you were just kind of looking at what’s generally believed, look at the volume for the day, you may say it’s a capitulation, but if you dug into it, you would know well the volume just spiked at 1 p .m because of this news and it was pretty heavy until 2 p .m and then it tapered off and in the morning it was small.

So in that case if you had that knowledge and if you could look within the volume, you would dismiss that, and you would say well even though the volume was heavy, this is not capitulation. The other thing you want is in a capitulation you want a ton of net supply. So our friends, you are familiar and I know a lot of investors are not, who are not our subscribers, they are often not familiar, that you really have to look at net supply or net demand of stocks.

If we’re talking about stock market or wheat or commodity, whichever commodity we are talking about? And that’s why we publish the VUD indicator. So we know in a given day, is there a net supply or is there net demand? So in a capitulation, we want net supply. That’s the orange bar that we show on the charts, and you want magnitude of the net supply very heavy compared to other days and that’s the acid test.

Dr. Natasha Arora [08:59]

It is generally believed that the volatility index, VIX, rises above 40 during a capitulation. And I know you agree with that. However, there is an important fine point that no one talks about. Nigam, can you share the secret with us?

Nigam Arora [09:18]

Sure, Natasha. So, when a capitulation is near, one sign is that VIX is rising, and that’s generally well known. You know, most people who pay attention, who study, know that. Typically, people expect VIX to go over 40, and that’s pretty well known. But if you stick with that, you can make a lot of mistakes. So, after all, every capitulation is different. The level during capitulation may be 40 or 50 or 60 or higher.

So, you don’t know in real time. You don’t know what level is saying capitulation is here now. And that’s why a lot of people make mistakes when they’re just looking at VIX level above 40. Now, you can kind of circumvent that and say, well, when VIX goes up, and then we want to start going down. But that gives also a lot of false signals. So, the absolute level doesn’t tell you much. But this is the secret I’ve discovered.

That when you are close to capitulation, VIX rise becomes disorderly. It means that it gallops mostly higher. So, what does that mean? Let’s say VIX is at 40 and then one second later it’s at 41, a minute later it is 42, it’s a gallop. It doesn’t keep on galloping in a straight line. One minute later it is back to 41. Ten seconds later it is at 43. Five seconds it is 44. Ten seconds back to 41. Ten seconds it is 44.

There’s a galloping of the move with the overall uptrend but kind of violent retracement and when you start seeing that then you know you’re getting close to capitulation and what you do is you watch for the disorderly VIX rise and then when the disorderly galloping mostly up or some to the down stops and it becomes more orderly then you know you’re close to capitulation, assuming that you know the absolute level was high enough over 40 and so on and so on.

Dr. Natasha Arora [12:10]

That makes a lot of sense, can you share with us the third secret of an epic capitulation?

Nigam Arora [12:18]

Sure and this is the most important one of all the secrets. Almost everybody thinks that capitulation is a one day event, meaning as I said earlier everybody who’s going to sell just sold it and they’re done. Well that kind of works if you’re looking for a micro capitulation and so on but for epic capitulation it’s not a one day event. It’s a process. It’s a series of capitulations, and I’m going to repeat this because out of this whole podcast this is the most important point contrary to anything you hear anywhere else. What you hear everywhere else is false. For an epic capitulation, it’s a process. It’s not a one day event and what you look for is a series of capitulations.

Dr. Natasha Arora [13:21]

Nigam you are known for giving a signal to back up the truck and buy stocks in March of 2009. With the benefit of hindsight, March of 2009 turned out to be the start of an epic bull market. Your call was spot on, and you made it at a time when almost everybody else was issuing sell signals. When you talk about various factors that went into your call epic capitulation is one of them. However, when I look at the chart, I don’t see the classic signs that investors are taught to look for occurring that period. Can you share the secret? Is there another one that will help our friends?

Nigam Arora [14:09]

Sure Natasha, this goes back to what I emphasized earlier that when you’re looking for an epic capitulation, it’s a process, right? It’s not an event and the reason I was able to call the bottom in March was a number of factors but one of them was an important one. In my estimation, the probability was high that we had seen an epic capitulation. If you look at it the trading pattern, there was a capitulation in November of 2008 and then if you go from November of 2008 to March of 2009 you see a series of capitulations depending upon which index you’re looking at or the popular stocks of the day and so on.

Essentially you’re going from that November capitulation so to speak, November 2008 many people called that for the final capitulation. I lived through 2008 but that really wasn’t it because when investors are bullish for a long time, as it was the case going into 2008, and FOMO is still there you want to get to a point where the FOMO is completely gone. People are not afraid of missing out. They don’t care. That’s where you get to. They want to throw up. They don’t care. They don’t want to make money. They just want to get out and that’s not a one day event.

Dr. Natasha Arora [15:54]

When I look back at 2008, many gurus kept calling that capitulation had taken place and the bottom was in and the market was going to go up. After brief rallies, the market kept going lower and lower. Where did these gurus go wrong?

Nigam Arora [16:14]

Well they were basically going on what’s publicly known and not doing their own deep study and really perhaps didn’t have their own money on the line along the way to have learned important secrets. So what most people do is they look at a large red candle and a heavy volume and they call it capitulation. So there are different type of charts. One of them is candlestick chart, which originated in Japan. It’s my favorite chart because it gives us more information. It tells us where the market opened, where it closed, what was the height of the day, the low of the day.

When the close is significantly lower than the open, that makes a large red candle. When they look on a day chart, they see high volume, well this is capitulation and as we talked earlier about, they’re not paying attention to the volume. We talked about was there an event during the day, what was inside that whole large volume, was there a net supply, and if there was, what was the magnitude of the supply.

They’re not looking at any of that and they’re not looking at other bars, where was the prior capitulation, what happened a week before or two weeks before or a month before, and how did the market react to the news. So they’re just looking at a singular event. I do remember that in 2008 many people kept on calling capitulations and  they’re starting urging their followers to buy stocks aggressively because capitulation had taken place, and people would buy stocks aggressively.

Market would have a brief rally and sometimes a vicious rally. In a bear market, you can get some of the sharpest rallies. And people will say okay this is rallying now I’m on the right track so they’ll put more money in near the height of the rally and then the market will go to lower lows and these people would get their heads handed to them.

And again the basic mistake is not really deeply studying and not really understanding that. For an epic capitulation, it is a process it’s not a one day event. Now if you’re looking for short term trades, you can trade that way based on one day, and as you said we’ll do separate podcasts on different kind of capitulations.  That’s I think why people went so wrong.

Dr. Natasha Arora [19:18]

This brings me back to the point that there are different types of capitulations, and they can be useful for different types of trades. Isn’t that correct?

Nigam Arora [19:28]

Yes so you know I think I encourage all our listeners and we kind of have explained that numerous times. The difference between strategic and tactical. Essentially strategic is long term, and tactical is hey I want to get in then I want to get out kind of thing. And typically. superimposed tactical trades over strategic investments.

We always talk about time frames from very very short term to very long term. We’ll talk about all that in future podcasts, but you know when we’re looking at epic capitulation we’re talking about a time when you can make strategic investments. Like 2009, in March I gave a signal to back up the truck and buy. At that time S &P 500 was 666.

It went to 4800 high, so think about the gains, and if you pick the right stocks, the gains were even much higher. From 2009 to 2011-2012, we had several hundred percent gains of so many of our positions, so it can be extremely profitable if you can call it correctly but you also need to have the sophistication to know the difference between strategic and tactical.

Dr. Natasha Arora [21:02]

Now, so far you have shared four secrets with us. What’s the next secret?

Nigam Arora [21:11]

Well, what I find very useful is looking at a tick chart. So, a tick chart is simply a chart that shows you a dot for every trade that happens. It’s not one minute, one second, it’s not composite of the time frame, it’s every single trade. And if you start seeing bigger gaps than normal, especially to the downside, then you’re getting closer to the capitulation. So, let’s think about it. So, let’s say there’s a very popular stock. There’s large volume, very, very liquid. Let’s say the bid is $148.10 and ask is 148.11.

So, you would see most trades taking place at either $148.10 or $148.11, and then let’s say it starts moving up, then you’ll see a trade at $148.12; it starts moving up. You’ll see a trade at $148.13, it starts moving up, $148.14, somebody’s trying to sell. Back to $148.13, back to $148.14, and so on. That’s what you will normally see on a tick chart on a highly liquid, popular stock. But what happens is, when you start getting closer to capitulation, the example I was giving, so the trade takes place at $148.10, and the next trade takes place at $148.05.

Now let’s say the bid is $148.05 and the ask is no longer one cent away $148.06.  The ask maybe $148.10. Now it’s a five cent bid ask spread, and then all sudden you see the next trade at $147.91, just a huge gap on the tick chart. That’s what we talked about on a tick chart. then of course let’s take an example of a stock that’s not extremely liquid, still a popular stock.

Let’s say it is trading at a bid of $10.15 and an ask of $10.20. If you’re looking at a tick chart you may see trades like this: $10.15, $10.15, $10.15. Some smart guy decided to split it $10.17 $10.18 $10.16 $10.19, $10.20, $10.20, $10.20 and the bid and ask is still $10.15 and $10.20. Then all sudden the ask jumps to $10.24 and the bid jumps to $10.19, and you see a similar pattern $10.19, $10.24, $10.24, $10.24, $10.18, $10.19, $10.20, $10.21. When you start getting close with the capitulation, you may see, so let’s go back you know the bid is $10.19 and ask is $10.24.

Then all of a sudden there is a trade at $10.05 and the next trade is at $10.01 and the next trade is at $10.91. Sometimes these trades are happening below the bid that’s being shown. Now it’s not supposed to happen that way, but that’s what you would see if you’re watching it. I find tick charts very very useful especially when I’m trying to really deeply study the markets and trying to really focus on something to see if there is a special observation to be made. In the old days, they used to call it tape reading.

If you go to some of the old texts, very good ones, they talk about people who knew how to read the tape, did it wel,l and what that was is you know this is the day before the computer they would print the trades on a tape on the stock exchange and people would try to read it and try to make the same kind of operation that I just described on a chart. By the way, that’s a great skill.

Some people were really interested in getting into that. I’m not saying that’s for everybody but you just make sure on your system, you know how to set up the charts and when you start getting to a turning point. You don’t have to do it every day, every week, every month, but you say, hey, I think the capitulation is happening, I think I’m right, and you know all of the reasons to think of buying. Well, look at the chart, stare at it for a few minutes, and you’ll see what’s happening. And I think our friends, you’ll find it very, very helpful.

Dr. Natasha Arora [26:27]

Why are there gaps on tick charts?

Nigam Arora [26:32]

Well, that’s an excellent question. So what happens is when you start getting close to capitulation, so market always has bid and ask, right? And what happens is bids start getting withdrawn. I think I’ll go back to the story of 1987 and I lived through it and I vividly remember.

So those are the days you know when we would call our brokers right because we didn’t have the internet and so New York Stock Exchange was staffed by specialists being there especially for the great honor and also literally a license to print their money and what specialists did is they use their own capital to keep the markets orderly and when I say orderly right like I was describing in earlier example how the trades may take place.

So keeping trades orderly meant that if one trade is at $10.20 the next trade is not going to be at $9.95. The next trade may be at $10.15. By the way, there was a time when trades used to be done in 1/8 and 1/16. It’s a different world, but the concept is the same. So in 1987 during a crash, brokers wouldn’t answer the phone calls and when brokers would answer the phone calls and their organizations are trying to get hold of specialists because brokers would have a floor broker.

If you’re a large firm, you call your broker and then they had a floor broker who’s standing there in front of a post on the New York Stock Exchange and of course in the pits in Chicago if you’re doing futures and so on. The specialists wouldn’t answer the phone calls. They wouldn’t respond. The floor brokers wouldn’t respond. Nobody would respond because nobody wanted to put a bid. Nobody wanted to buy.

Now that’s an extreme example, but it actually happened, and I lived through it. So basically bids are withdrawn so if there are no bids and you want to sell, it goes way way down, the price goes way way down. And that is a sign of capitulation, true capitulation when you see bids being withdrawn again and again and again and again.

Dr. Natasha Arora [29:11]

Can you share with us the sixth secret?

Nigam Arora [29:15]

Yeah, it is kind of a corollary to what we were just talking about bid ask spreads widen, right? So if you’re trading an ETF, let’s say SPY, your bid ask spread is one cent, and off exchange you can get a fraction of a cent, but whatever, one cent. And all of a sudden you start seeing them two cents, three cents, four cents, five cents, six cents. And the reason is there’s uncertainty, right? Bids get withdrawn. There are a lot of high frequency traders out there.

They say, well the last trade is let’s say at, I’m just picking a number, $400.31. Somebody says, well, I don’t think I want to have a bid at $400.30. I don’t think I want to bid at $400.29. I think this thing is in the fall. But I think if I can bid at $400.26, I’ll be okay because there are enough buyers. I’ll buy at $400.26 and I’ll be able to sell it at $400.27 or 28. You know, I’m pretty confident. And this is what high frequency traders do. They’re just trying to get there once then or two cents maybe.

And that’s a very big part of the volume that’s out there. And then on top of that, the market makers have computer programs which are essentially looking at the trading pattern and putting a bid or ask. You know, they don’t do it manually. It is a computer program doing it. And those computer programs are programed that when markets start falling, hey, put your bids lower. So they start putting their bids lower and lower. And that’s why bid ask spread widens.

You start seeing some very disorderly widening of the bid and ask spreads, something you will not even imagine under normal circumstances. So that’s a very good indication. If you have level two quotes, it’s helpful to watch them. In general, I’m not a fan of level two quotes. I think they mislead you. And I know again, some people get pretty mad because they’ve made their careers. They’ve invested a lot in their software program and watching level two quotes.

But they’re a game. If that’s what you’re doing, level 2 quotes, under normal circumstances, stop watching them because you’re game. Because smart players know that a lot of people just watch level 2 quotes. And so the gamer, they put in the quotes that are not real. For example, so for those who are not familiar with level 2 quotes, so the top level quote is, here’s the bid, here’s the ask. Well, level 2 quote will tell you there are 100 shares to buy at, let’s say, $25.21. And there are 200 shares at $25.20, and there are 300 shares at $25.19, and there are 5,000 shares at $25.18.

They will also tell you, you know, which exchange or ECM they’re at or which market maker. So these are level two quotes. Now intuitively it seems like a great idea that you have all the information. You lose money if that’s what you’re doing. And many people spend years doing that and finally throw up their hands after losing a fortune. And the reason is, let’s say if I’m a smart person and I want to sell 10,000 shares. Okay, so what would I want to do? I would want to create demand so I can sell 10,000 shares.

So what I would do is, let’s say the stock is trading at $25.20. And I will all of a sudden show that I want to buy 10,000 shares at $25.07. Okay. With no real intention of buying. But everybody’s watching level two quotes would say, oh my God, there is a big buyer at $25.07. And maybe they’ll increase their bid, but at least we won’t go below $25.07. I can put my stop right below $25.07 at $25.06. And I’m going to buy it right at $25.20.

Right. And the next person sees that and he says, oh, okay. Well, the bid has moved up. So I’m okay. I’ll buy $25.21. And next person says, okay, it’s moving up to the big buyer at $25.07. I’m going to buy $25.22. And now the big buyer at $25.07 is smart enough. They’ll move it up by a cent. So they’ll move it up from $25.07 to $25.08. And now everybody’s watching the bid as far as, oh wow, this buyer is pretty aggressive. They want to move up.

So now they’ll take a chance. Maybe they’ll buy $25.23, $25.25. So the price starts moving up. And as price starts moving up the person who wanted to sell those 10 ,000 shares, they start selling them in increments of 100 shares. They keep on selling and lightening up. And the price is moving up. They end up selling their 10,000 shares and then the bid at $25.09 or whatever they had 10,000 shares just disappears, okay.

That happens day in day out. So it’s very important not to depend on level two quotes but under certain circumstances it kind of helps, especially as bid ask starts widening to take a look at it.

Dr. Natasha Arora [35:33]

Now I’ve studied your successful calls, and I noticed that you also pay attention to unrelated assets. Can you tell us about that?

Nigam Arora [35:42]

Sure. When you reach close to a capitulation, you start seeing somewhat disorderly moves in unrelated assets. For example, if we’re looking at a capitulation in stocks, you start seeing disorderly moves in bonds. You start seeing disorderly moves in the dollar. You start seeing disorderly moves in gold. You start seeing disorderly moves in oil. Now, that’s all history that I know. Going forward, maybe cryptocurrencies would be something, but you don’t have a lot of history, a lot of data.

Also, in cryptocurrency, there’s not a lot of transparency. They’re not well regulated. You don’t always really know what the volume is, so it’s hard. But anyway, so I’ll share an example, which is really a special point. I used to be a big fan of floating rate loans. We used to actually have a position, always a position, almost always a position in our ZYX Allocation Model Portfolio. My favorite was VVR. What are these floating rate funds?

Well, what they are is they are senior floating rate loans that banks have. Let’s say a very good company, good cash flow, good balance sheet goes to the bank and says, hey, I’m going to borrow $100 million and borrow bank loans of $100 million, and that $100 million is secured by the plant and equipment, and they’re the senior most, meaning if something goes wrong, stockholders will get hurt, and the debtors, who may be unsecured or at a lower seniority level, may get hurt, but they will get paid.

Let’s say the company has $5 billion worth of plant and equipment and the bank says wow we loaned them only $100 million and we secured it by $200 million worth of plant and equipment. That’s double the security, plus we are senior most, meaning we have to be paid first if there’s a bankruptcy. That takes away the balance sheet risk right that the loan wouldn’t be paid back. Then these loans are at a floating rate, meaning their interest rate adjusts every quarter. Now you don’t have the interest rate risk. Otherwise, when you loan the money there is an interest rate risk.

For example, banks are seeing that now, these are secure types, but think about a mortgage. Whose ever got a mortgage at 2.5% for 30 years, somebody sold that to somebody owning that mortgage at 2.5% for 30 years, who still owns that mortgage is now stuck with earning 2.5% for 30 years unless the borrower decides to prepay the mortgage.

Then they’re out of it, and they can deploy their money to higher interest rate, maybe 5% now.  That’s a lot of money over 30 years. So there’s interest rate risk in these things, but these things, the floating rate loans, senior loans are floating rate meaning every quarter the rate adjust. You don’t have interest rate risk. Now all of a sudden you don’t have an interest rate risk, and you don’t have a default risk.

You don’t make a lot of money, but you can still do better than you would otherwise sitting in cash. It’s kind of a cash equal and a kind of thing you could use to make more money. I used to be a big fan of these because they made sense, but here comes the experience  having gone through capitulation. That’s what happens during capitulation. Something like a floating rate bond. I remember in 2008, they’re losing 50% of their value. Now I was a buyer at 50% and actually did well with those because it’s an unrelated asset being sold.

Anything that can be sold, it becomes disordered, and that’s what happens near capitulation; they also start selling everything including good stocks with good fundamentals and good valuations. That is the seventh secret. There may be a stock, and I won’t name it at this point. It is a stock that may be cheaply valued. It’s not going to go anywhere in terms of going bankrupt or anything. The business is good. Even if the economy is bad, the business is still going to be good.

The growth may not be at the 100 rate or whatever will go every year four five ten percent, and they’re at great value, good dividend. Why would you sell those stocks? Even those stocks get sold, and the reason is the margin calls. People get margin calls. They don’t know what to do other than raise money, so they sell what they can. That’s one thing that happens.

The other thing that happens is somebody may look at it as that good stock that we talked about it’s a liquid stock, they say well if I sell this I’ll lose only 10% or 20% but then I have this speculative stock here if I sell that I’m gonna lose 80% and nobody likes to take losses you know so they’ll go ahead and sell that good stock so when you come near capitulation you start seeing very very good solid good value stocks being sold and being sold aggressively.

That brings me to the eighth secret, which is somewhat related. Every capitulation has its own kind of favorite stocks that are sold. For example, in 2008-2009 these were banks and housing stocks and so on. Now, technology is popular, so you know Cathie Wood type stocks have already been sold. If there is a capitulation, they may be even sold more, but then there are great favorite technology stocks Apple, Microsoft, Google, Nvidia. If they’re selling technology stocks, they may sell those.

Here’s the eighth secret: not only those stocks get sold but the stocks that hold up till the very very end, which actually people are buying. Like if oil prices are high then oil stock or very stable healthcare stocks like Johnson and Johnson, J&J, United Health, UNH, electric utilities and we did a podcast about utilities in terms of Warren Buffett, one of the jewels, and I encourage everybody to listen to that. They also get sold at the end. When you start seeing that kind of selling in sectors that in general in that market were not being sold and were being favored, then you know you’re at a capitulation point or close to it.

Dr. Natasha Arora [44:05]

What’s the ninth secret?

Nigam Arora [44:07]

Well, you’ve got to look at technicals and you see drastic overshoots, you know. You see RSI going to 10 and we show RSI is the indicator of internal momentum. And just in a chart, big overshoots and the prices go to a level which is hard to believe. This happens especially for stocks. For example, a stock like Tesla, right? I mean if you start seeing huge overshoots on the downside on a stock like Tesla along with everything else, then you know there is a capitulation happening or near capitulation.

Again, it’s not Tesla; every period has its own group of stocks. There’s IBM; there was GE once upon a time; there was Bank of America once upon a time and so on and so on, Morgan Stanley, Goldman Sachs. There are different groups of stocks, but again you look at some of the very popular stocks and and you look at their price. You know they’re falling. You know they’re falling a lot, but you look at the price and you take a double take wow look at how low it has fallen.

When you look at the chart you see this big red candle day after day, and the last one is just getting huge. You start seeing RSI. You know RSI we say under 30 is oversold. Typically, you know we get to 24, 25, 26. We don’t see numbers like 10 or something that, and again I tend to look at nine day RSI.  Conventional is 14 days. I find that in these market conditions nine day works much better than the 14 days like the textbook says. You don’t have to go with the textbook right.

Those were written a long time ago with different market conditions. The problem is nobody really tests them and looks at them. They keep on just going with the dogma that somebody wrote 40 years ago or 50 years ago. So, nine days is good these days, and then you know you can plot RSI on a 15 minute chart and kind of look at it and see how oversold it is getting. That’s the ninth secret.

Dr. Natasha Arora [46:35]

It makes a lot of sense that in capitulation there’s overshoots to the downside. What is the tenth secret?

Nigam Arora [46:48]

Well, Natasha, the tenth secret is evaluation support. Now, you have to know something about valuations. When you take a double take at these prices, and if you think about it, you say, if I were not buying this stock, and if I were going to buy this company as a business, right, if I’m going to buy this whole company, at this price, based on the future earnings power, and that’s what you’re looking at, earnings power and other assets.

Now, in the past, we could look at other assets, but now we’re looking mostly at future earnings power, because a lot of our companies really don’t have as much plant and equipment like they used to. You know, now we are into branding and marketing and all kind of stuff. There’s valuation support, and then you also start looking at the cash.

For example, right now, I find a lot of biotechs. I’m not saying that it’s a capitulation yet, but I’m beginning to see a lot of biotechs that are trading below the cash, meaning if these companies close their doors tomorrow and said, we’re done. We’re going to let all employees go. We’re going to let all our intellectual property go. Whoever wants to take it is fine. We really don’t care. We’re done. We have this much cash, and we’ll just distribute the cash to shareholders.

These companies typically have no debt or if they have some debt, we will pay off the debt and whatever cash is left. We recently have a trade like that going on right now where the cash level is significantly higher than where the stock is. But you start seeing that as a kind of example of a valuation support, and we begin to see that as we record this Goldman Sachs, the premier investment bank rate firm just fell. The stock fell below their book value.

Now, their book value didn’t play and it had an issue, so I wouldn’t say call it capitulation. But that’s an indication. Now, if Goldman Sachs starts falling at 50% of the book value, I’ll be interested, but a good indication is how much is the net cash this company has and how close we’re getting to it. If you start seeing that in a lot of companies and if you can estimate some value of the franchise or some value of the plant, equipment, people, and all that.

And you say, oh wow, these are really liquidation values now. So if you start seeing that kind of thing and you don’t see that in every company, but if you start seeing that in a lot of companies, then you know you’re at capitulation or close to capitulation. So my friends, what you have to do is you have to kind of put it all together. We talked about 10 secrets. All these 10 factors are not going to happen every time. In 2008 – 2009 epic capitulation, all these factors happened in technology stocks.

It started in March 2000. They kept on going down, down, down. People call this capitulation, and then they’ll rally 20%, and they’ll go down more. But finally around 2002, you could see that all of these 10 factors were in play. You could make a lot of money if you bought it. For example, Amazon at one point lost 95% of its value or 90+%,  whatever the number was. If you could buy at that time, you did well.

So the key is to put it all together you know you’re not going to see all of these factors. Remember, for epic capitulation it is a process, and the best thing you can do is increase your knowledge. I’m not going to say capitulation happen tomorrow, but you need to be prepared. The rewards go to the prepared because if you’re not prepared and you’re not thinking about it. Then you don’t have the knowledge.

Then what happens is when the kind of things happen, what we’re talking about, and this is when you know in 1929, from what I understand, people were jumping out of their windows right from these high rises in Manhattan and killing themselves We don’t see those sick now, but people feel like they’re going to throw up. It’s a stomach churning event, so what do people do? People sell at that time.

They don’t buy. They’re not prepared, and part of it is not their fault either because you know they get into this just buy anything and hold it. For example, we’re seeing a lot of new subscribers coming in from several popular services now because what these popular services do they give you stock of the month two stocks every month that’s a buy buy buy. It’s great, it’s simple. You just join the service. They tell you which stock to buy. You don’t pay any attention to the price you’re buying at because they say hey it’s going to go up 10 times, 100 times so it doesn’t matter what price you buy. Well that sounds good.

You don’t have worry about how much you buy right because it’s going to go up 10 times. You don’t have to know any full core position size or anything. You don’t have to worry about diversification because these services know what they’re doing. No matter what they tell you, they say, buy these things and go up 10 times. So it doesn’t matter if you’re diversified or not. It’s just going to go up 10 times. People believe that. I mean, they’re newbies until they have experience.

So they buy all these things. Now, we have subscribers, new subscribers coming in, they’re telling us, gee, I’m down. I’m not trusting these guys, these services, I’m down 80%, I’m down 90%, I’m down 70%. And these services never sell, right? There are no sell signals. It’s just buy signal. So what do we do now? So now, and the reason I’m bringing this up is, if you’re one of those people who believed in somebody like that, or maybe you had a financial advisor who was like that.

Although most financial advisors are smarter than that, at least the ones we know, the ones who subscribe to The Arora Report are very smart. Investment advisors who are our subscribers are exceptionally smart, so they won’t let that happen with their clients, but there are some that are not that great ones, a lot of services like that. Then if you go to Reddit and some of these boards, there are a lot of people just preaching the same thing to buy and hold on, irrespective of anything.

The problem these people run into is, even if they could identify the capitulation, they don’t have any cash, they can’t buy, right. I know it’s hard to hold cash or cash equivalent earning very low interest or zero interest or they’re getting better now, but look at the flexibility it gives you. That’s how people become really wealthy, because when things get cheap, they have cash. Think about it, if you’re always invested, then when things get cheap, you don’t have cash, you can’t buy it, right.

Just remember, maybe with stocks it’s harder to understand, but, you know, I was looking at buying some property in Florida, and talking to the realtor, and she seemed to be living the lifestyle of somebody who has lots of money, but it seemed to me that she really wasn’t making that much money selling real estate. I asked her a question of the history and all that. It turned out that her whole family, her husband, her father-in-law, they’re all from Toronto.

I think it’s Toronto, and her father-in-law had the wisdom that in 2008 when Florida crashed real estate crashed he’d been holding cash he’s a practice of always holding cash, lots of cash. He didn’t invest in the stock market before 2008. He didn’t invest in real estate. He just held on to cash when everybody was saying hey you know we’re making a lot of money in the market or flipping houses or whatever he’ll hold into cash. In 2008 when everything in Florida crashed, he came in there and he bought a ton of real estate.

That real estate has gone up in value tremendously, so it’s a very rich family now. The point here is it’s important to hold cash because it may seem like you’re on the losing end for a year or two or three or four or five. But again, if you look at your goal as maximizing the wealth you generate over the long term, over your lifetime, you have to have cash to take advantage of future opportunities.

Dr. Natasha Arora [57:00]

And there you have it, my friends. You now know the 10 secrets of an epic capitulation. This podcast will help you separate out the real epic capitulation from false ones. When an epic capitulation occurs, it is time to start looking to buy. It is important to scale in and be sure to follow the Trade Management Guidelines. Goodbye until next time.