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Capitulation

Investor capitulation is defined as the act of surrendering or giving up.  Capitulation is when stocks continue to tank in the panic selling and they go far beyond what is reasonable downside.  It is when sellers get so scared they are consumed by their emotion and rational thinking escapes them.  They just want out at any price they can get. This selling frenzy is painful but relatively quick. Consequently a sign of capitulation is mass selling that occurs over a brief time span.  Usually it happens at the end of a long downtrend and it will be a fierce decline in one single day (the last day of the decline).  

In midJuly of 2002 there was some speculation of another capitulation possibly occurring as stocks fell below their September 2001 lows. The S&P fell slightly below 800 in late July 2002 a 47% decline from the high set in March 2000. The Nasdaq fell below 1200 an amazing 70% below its all time high just above 5000.  Not only did individual investors panic and sell the last of their shares the free fall was accelerated by individuals who owned mutual funds and were taking their money out of them.  In order to meet these mass withdrawals fund managers had to sell their stocks which accelerated the selling and the end result was a massive landslide. 

The Media is Always Late
The media is always late to report capitulation.  They fail to see the early signs and start to report it after it has happened. You will know capitulation happened at the close of the day it happens.  That is when the media will report it and by then it is too late.  In fact when the media starts talking about capitulation or a bear market this is a very bullish sign and time to buy stocks in droves.  In realtime the media is wrong in its calls on market turns. The media is a good misleading indicator one that you should almost always bet against. It was late in calling the 1987 crash the dotcom bubble and it will be late calling this recession that we will be in if the Fed keeps raising rates. 

The Big Question Is
Will there even be capitulation in this market selloff Capitulation does not always happen and there may not be one at the end of this sell off either.  Everyone is expecting this current market downtrend to end with capitulation and since everyone is expecting it it is likely not going to happen.  True capitulation will happen out of the blue for no apparent reason and when everyone is not expecting it to happen.  A good example of it would be after everyone thinks the market has bottomed and a rally begins.  This rally will be a signal to many that the market has bottomed and they need to jump in before they miss the move.  Just when they think the market is on its way up it happens.  Will it happen in this market downtrend Nobody knows the answer; all we can do is prepare for it should it happen so that we can take full advantage of it when and if it does.





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