Capitulation
Capitulation is defined in the dictionary as “the act of surrendering or giving up.” On Wall Street, capitulation is also associated with giving up, as the term refers to times when almost all investors sell their stocks in order to get out of the market and into safer investments such as bonds. True capitulation is characterized as having very high volume and steep declines. Capitulations are also very quick, and it usually takes at most a few days for the sell-off to occur.
Capitulation is basically a form of panic selling, as investors who have stayed in the game and continued to slowly lose money in the hopes of a rebound give up all hope for a turnaround and decide to just give up on stocks and move into other investments. To explain capitulation through a sports scenario, imagine a basketball team that has been losing the whole game by around 15. The coach is the investor, the starting players are the coach’s individual stocks, the reserves are the bonds, and the basketball game is the stock market. The coach will keep his losing stocks (starters) in the game (market) until he finally gives up hope that there is a chance for a comeback. After surrendering and seeing no hope, the coach will take out his starters (stocks) and put in his reserves (bonds), because he knows that it is not worth getting his starters (stocks) hurt more than they already have (That last analogy might have been a little bit of a stretch).
Because of the panic selling that goes along with capitulation, many people believe that it is the true sign of a bottom in the market. Thus, a lot of investors think that there are great bargains to be had right after a capitulation, as the price of stocks should bounce off the exaggerated lows.
Niki Pezeshki
College Trillionaire
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