LONDON Are global stock markets set for "capitulation" after sliding to six-year lows and wiping out a stuttering recent recovery?
One key factor is preventing that sharp, panicky selling of shares that cleans the stables out and heralds an equities rebound: the piecemeal nature of government attempts to rescue banks and the economy.
"We need to see an index falling 7 or 8 percent intraday in high volumes and then ending up nearly flat on the day as the buyers come back in," said Philippe Gijsels, strategist at Fortis in Brussels.
"What we're getting instead is Chinese water torture, and no massive cleanout. Governments and central banks are tending to watch stockmarkets and giving investors small glimmers of hope, not enough to take markets higher, but enough to prevent a sell-off."
So for capitulation to happen, markets will have to be hit by a big, negative news event, and for the rebound to be sustainable, the overall environment would have to improve.
"We need to see an event that would shock everybody -- a big U.S. bank failure, or a country in Europe going broke," said Mark Bon, fund manager at Canada Life.
Bon said positive factors that would need to be in place for any strong rebound included an improvement in consumer or business confidence indicators, some merger and acquisition activity, successful rights issues and a belief among investors that company profits had bottomed out.
"We would have a sharp sell-off triggered by an event, and then a turnaround as people reversed their short positions and bought into a rally," he said.
The MSCI world index .MIWD00000PUS hit its lowest point since April 2003 this week.
The index fell more than 43 percent last year, punctured by a credit market crisis with its origins in collapsed subprime U.S. mortgages, and is already down 16 percent this year.
Between November 2008 and January this year, there was a 27 percent rally driven by investor relief that governments were acting firmly to deal with the crisis.
Since January, however, global equities have slipped steadily as it became clear that the government moves were not enough to stave off a sharp recession in top economies.
NO CAPITULATION = SMALLER FALLS, WEAKER RALLIES
The MSCI World index fell 6 percent or more on three days in November and early December 2008, when the rally began. But since then, there have been only two days of falls greater than 4 percent.
There was a 6-day winning run in November, including one session in which markets rose nearly 7 percent; December saw a nine-day winning run which was, however, considerably flatter, with the biggest one-day gain being 2.7 percent.
Indeed, markets have been characterized by an increasing unwillingness to take big positions. The top day gain in the index so far this year has been 2.8 percent.
"The investment horizon for the market as a whole is short, and the volume of long-term investors coming in is not there to sustain the bull trend you need -- there is no flow of new money," said Bon.
BUT IT COULD HAPPEN...
So is that disastrous event that might kick off a capitulation likely to happen or will governments act quickly enough to head it off?
Governments in the United States, Britain, Germany, France Ireland, Belgium, the Netherlands and Switzerland have moved to bail out their financial institutions and shown that they will act to prevent bank failures.
Central banks across the world have cut interest rates in a move to spur the economy, and some are expected to embark on quantitative measures such as printing money and buying assets from banks.
And the IMF, the EU and the World Bank agreed a $25.1 billion economic rescue package for Hungary last November, illustrating that multilateral agencies are on standby to act in the event of a country running into problems.
But Standard & Poor's head of sovereign ratings said on Wednesday that he expected more sovereign rating downgrades than upgrades this year compared with last year, and the agency cut its rating on Ukraine, underlining concerns about emerging Eastern Europe.
And there are some analysts who feel that the probability of capitulation is increasing.
"I would have thought the chances of it happening are 60-40," said Mike Lenhoff, chief strategist at Brewin Dolphin.
(Reporting by Sitaraman Shankar; Editing by Andrew Callus)