Capitulation
One of my favorite things about Warcap is the interactions we have with our vast array of astute clients. After 20 years in business, we have built a substantial book of highly intelligent clients. Our unique advantage—compared to a large mutual fund company—is that we communicate with them directly, whether markets are soaring or faltering. This communication allows us to gauge the two market extremes: fear and greed. With indexes like the NASDAQ falling 13% in just three weeks, the fear gauge is on the rise.
Over my 30 years of investing, I have witnessed what I consider to be three true market crises: the tech bubble of 2000, the financial collapse of 2008, and the COVID-19 pandemic in 2021. Having been in the market trenches during 2008 and 2021, I can state that today’s situation is vastly different. During both of those periods, markets had to function amid extreme uncertainty—whether stabilizing the financial system in 2008 or preserving lives in 2021. Those uncertainties don’t exist right now, but as we move into 2025, I have noticed several market similarities to the 2000 bubble.
In my January 28th piece, I warned about high P/E stocks that were “priced to perfection.” That warning stemmed from my experience in 2000 when valuations on tech stocks completely decoupled from fundamentals. I saw similar conditions in January, and profit-taking on certain stocks was the right move. Momentum investors—which we are not—have once again been reminded of valuation risk in this market downturn. The question now is whether investors have capitulated enough for a market bottom.
Markets bottom for a simple reason: there are no more sellers. Many technical measures, such as the VIX index and market volume, are helpful in identifying fear extremes, but the volume of incoming calls to our team provides valuable insight as well. On a scale of one to ten, I would say we have reached about a seven on the fear gauge. Another 10% drop in the indexes would likely bring us to full capitulation, as the market would simply run out of sellers. The challenge is that markets usually don’t collapse, so allocating sidelined cash to your highest-conviction ideas can allow you to capitalize on market rebounds. We are prepared to act decisively as market capitulation unfolds, seizing opportunities as they arise.
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