Message

Hi Jon,

Here's a point of view on the notion of capitulation from an = excellent=20 technician and market veteran, John Mendelson. It's awfully hard to = say how=20 the market will find its bottom, and it's very possible that we may = get some=20 "false" FTD's. But I do know with certainty that there will be no = sustainable=20 upturn *without* a FTD.

Katherine

=3D=3D=3D=3D=3D=3D=3D=3D=3D

Weekly Market Analysis

John A. Mendelson

July 23, 2002

A View Of The Market

Some Recent Questions From Clients:

Do you expect to see a capitulation by investors before this = decline=20 ends?

The prospect of capitulation, or a climatic downward trading spike = that=20 exhausts the selling,

appears to be very much on the minds of many, particularly the = financial=20 press. The "need" for this

has been mentioned in numerous articles.

First of all, nobody knows for sure if this event will occur. We = have=20 clearly seen an

acceleration of selling in the last two weeks that has moved the = market to=20 an extreme extended or

"oversold" position. In this regard, 99% of the stocks in the = S&P 500=20 (SPX =96 820) are below their

ten-week average, a higher percentage than September 2001 or = October 1987.=20 Furthermore, actions

reflecting investor sentiment such as the CBOE Put/Call Ratio, the = ten-day=20 average of the Arms

Index (TRIN =96 1.67) and the NASDAQ Trin (TRINNASD =96 0.62), = measures of=20 buying and selling

pressure on the market, and my proprietary "Diaper Indicator" all = are at or=20 near historically extreme

levels, as is the CBOE OEX Volatility Index (VIX =96 48.23). = Furthermore,=20 NYSE short interest is

now the highest in history and the dividend yield on the S&P = 500 is=20 higher than that of six-month

U.S. Treasury bills, a most unusual event in modern times.

My point is that one might say we have already had a = "capitulation." I=20 would also note that

the 1973-1974 bear market, the worst I ever saw, ended on October = 3, 1974=20 with a "whimper, not a

bang" after twenty-one months of slow death on low volume=85there = was no=20 capitulation. In

addition, the 1929-1932 bear market bottomed on July 8, 1932 on = volume well=20 below many days in

the prior two months. Who knows? =85 my personal view is that = investor=20 capitulation is not

"needed" to form a bottom and that many sentiment indicators are at = more=20 extreme levels than at

previous historic lows.