Fear Pays the Bills – March 6, 2025
Wall Street is a waiting game.
Traders make hay when volatility strikes.
Ultimately, fear pays the bills.
Professional traders’ P&L follows the Pareto principle, also known as the 80/20 rule.
80% of the profits come from 20% of the setups. This is accurate as I vividly remember how lucrative forced selling events were.
The capitulation liquidity cycle follows a repeatable pattern:
- First, news headlines or worries seemingly spring out of nowhere
- Small scale selling ignites a surge in volatility
- Everyone rushes for the exits at once
- Fast market conditions ensue, market makers widen their spreads, and big Wall Street paydays are made
We’re in the midst one of these events right now. Our data reveals some of the largest outflows in years. While it’s painful to sit through, watching portfolios drop…ultimately these capitulatory events pave the way for the next leg higher.
Selling out right now, may feel like the right move…but when you study history, you find that it rarely pays off.
Fear pays the bills on Wall Street…not Main Street.
Today we’ll circle the money flows landscape and unpack the latest equity gyrations. Believe it or not, the setup favors the bold.
Markets Experience Extreme Capitulation
Selloffs appear the same through the lens of data.
Headlines change depending on the situation, but supply and demand is the ultimate power law.
On Tuesday March 4th, we saw 373 discrete equities log outflows. This level of selling matches the August 5th, 2024 capitulation episode and the Friday March 17th, 2023 selloff.
Below I’ve circled Tuesday’s action and prior similar forced-selling events:
You don’t have to be a member of Mensa to see the obvious: These large red bars tend to not last forever.
But let’s keep going. It’s not just equities feeling the pain…ETFs are also getting liquidated.
Investors are hitting the sell button on funds.
On Tuesday, 88 ETFs fell hard as volumes surged. This is similar action to January’s and December’s action and August of last year.
I’ve circled these rare outflow days and provided arrows:
The only group making money right now is Wall Street. Fear Pays the bills!
But if you focus only on today, you’ll miss tomorrow.
Money flows in phases. It’s a repeatable pattern that goes like this:
- Phase 1 is huge buying and very little selling (think FOMO)
- Phase 2 is where buying slows and selling grows (market tops)
- Phase 3 buying slows further and selling takes over (correction)
- Phase 4 buyers are gone, and sellers are in control (capitulation)
Here’s a graphic to bring this all together…don’t focus on where we are, focus on what comes next:
As I wrap up, it’s important to understand that my positive view isn’t based on the eye-ball test.
Yesterday, we put together a data-driven report for our PRO members highlighting the forward returns for markets post these capitulation events.
Additionally, we detailed a list of all-star stocks we believe are being unfairly punished. Moments like these rarely come along.
In fact, Pareto’s principle is coming into play…for you. The handful of capitulation days will prove to be a profitable setup for the bold.
The biggest dips often precede the biggest rips.
Don’t fall victim to fear. This selloff will eventually fade, and money will flow violently back into equities.
It’s simple.
Fear pays the bills on Wall Street.
Being bold pays the bills on Main Street.
Author: Lucas Downey