Me Media: What is Capitulation?

Nice article in the WSJ and on their Marketbeat blog on the concept of Capitulation:

“The selloff that sent major indexes into bear-market territory has some investors awaiting the “capitulation” moment that signals it’s time to dive back into stocks.

It often seems like investors are looking for a road sign emblazoned “Capitulation: Three Miles.” But capitulation is one of those market paradoxes — it can’t really be quantified until those most eagerly awaiting it are themselves frightened out of the market.

“You have to picture someone on the deck of a battleship handing over a sword to an enemy, not this ‘Hey, the market’s a little tough, but I think we can get a trade on the long side’ stuff,” says Barry Ritholtz, director of equity research at Fusion IQ.

Not all signs of this vaunted event are anecdotal or ephemeral. Analysts say there are a few hard numbers that would indicate a selloff has reached a crescendo.”

We addressed this issue more completely back in 2006.



Caught in Capitulation Catch-22
Investors Are Awaiting Signs That It’s Time to Buy, But Until They Give Up and Get Out, Signals Are Mixed
July 9, 2008; Page C6

Capitulation Nation
David Gaffen
Marketbeat, July 8, 2008, 2:28 pm

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What's been said:

Discussions found on the web:
  1. Chuck Ponzi commented on Jul 9

    Remember when trading was not all “up in your head”?

    We’ve all switched to the marriage counselor’s version of investing. Crap.

    I give up.

    Is that capitulation?

    Chuck Ponzi

  2. Douglas Watts commented on Jul 9

    Funny quote, Barry.

    aka “He was a motivated surrenderer.”

  3. Ben commented on Jul 9

    My first sign of capitulation: Jim Cramer. When he’s cowering underneath his desk as if he was taking mortar fire, then it’s a bottom. Otherwise, every sell-off will just prompt another short-term oversold reversal call.

  4. SteveC commented on Jul 9

    Sentiment is certainly bearish, but real fear? No, not yet. Will get real fear before the decline ends? Who knows, maybe not.
    I’ve never seen so much interest in the VIX lately. I don’t like it when CNBC is talking about the VIX, Fast Money, Mad Money are talking about the VIX, and traders are all waiting around for a spike in the VIX. We just might not get that spike that many are looking for. Remember one of the great true-isms about the market is that it usually manages to frustrate the maximum number of participants as possible.

  5. jimcos42 commented on Jul 9

    Same line of thinking applies to real estate.

  6. Andy Tabbo commented on Jul 9


    What happens at capitulative tops and bottoms is an “EVENT” that scares EVERYONE.

    That’s why after a major rally, energy often sells off when the hurricane finally hits. That’s why after a big drop in the stock market, an initial bottom gets made on a SCARY bank run.

    Capitulation will occur on the S&P 500 when the most ardent bulls get really scared…it’s going to be an “event” that nobody sees coming.

    – AT

  7. Barry Ritholtz commented on Jul 9

    Steve C.

    We always get real fear at the end of a Bear Market.


  8. mhm commented on Jul 9

    It could have been yesterday if Bernanke didn’t open his mouth… Maybe I missed it but how is he funding the promise to bail out each and all institutions?

    Fiat money, I know, but somebody has to buy the auctioned treasuries, right? It needs to be massive amount to fund the Fed to a comfortable level… what if it fails partially?

  9. DL commented on Jul 9

    When everyone is asking if we’ve hit bottom, it means that we haven’t.

  10. Jay commented on Jul 9

    I’m waiting for perma-bull Don Luskin to thaw. That will be a great bottom.

  11. Bruce in Tennessee commented on Jul 9

    Well, as a general thought…if you are one of those folks who, in a bear market, keeps jumping back in and getting burned…trying to “catch the falling knife”…then you should find someone with more common sense to manage your investments…

    If your financial adviser does the same thing…fire him and find one with more common sense….

    it really isn’t that hard…but we do learn the costly lessons finally…and I am in that crowd..

  12. Steve Barry commented on Jul 9

    The bottom is Cramer AND Fast Money canceled.

    Down goes Freddie…down goes Freddie

  13. Short Man commented on Jul 9

    This time around, we will not be anywhere close to a bottom until the viability of the financial system itself is questioned. To date we’ve had an “orderly” series of failures because the underlying cause has been the housing collapse which itself is a slow motion event.

    However, we are now starting to see the snowball pickup speed as it rolls down the hill. Lehman, Citi, BoA, RBS, DB, Fannie, Freddie, GM, the entire commercial real estate market, etc. etc. are all highly vulnerable. Put two or three Bear Stearns sized failures together in a trading week and only then will you have blood on the streets. And don’t think about buying then either as it won’t be a v-bottom. You have to look beyond 2010 for any real recovery.

  14. constantnormal commented on Jul 9

    BR – “We always get real fear at the end of a Bear Market.”

    OK, I’ll bite. Where was the “real fear” at the conclusion of the dot-com collapse? It seemed to end with a whimper rather than a scream. During the precipitous drop in 2000 there was some Real Fear, but less in 2001 and less still in 2002, as an air of resigned despair set in.

    And the rise off that low wasn’t that strong either, in keeping with a decline that had burned itself out and a recovery that took a while to build up some steam.

  15. leftback commented on Jul 9

    Happy I dumped my UYG at the end of Tuesday’s session !!

    Lots more volatility now – could be very close to a short term bottom, there was a lot of wholesale selling today into the close.

    The real bottom? Not even close. There is still no general panic out there – some dining companions recently chastised me for taking too much “risk” by selling in August. Interesting mind games, since they must be down about 20%…..

  16. paul commented on Jul 9

    If somebody jumps off the top of the Empire State Building – at the 44th floor on the way down – is not where it started – it started at the jump – when you hear the splat (and not a minute before) is capitulation – I have heard this term used for the past few months – in the news “are we there yet? – when you see the “eye balls – floating in a pool of blood” – That’s capitulation!

  17. maynardGkeynes commented on Jul 9

    The capitulation if and only if 401k rank and file investors no longer invest in equities. We are not there and may never get there as long as there are mutual fund families with big advertising budgets and unmerited respect, eg, Vanguard, pushing the mantra of “stocks for the long run.” Also, pundits like Jeremy Siegel have to have a stroke that renders them mute (nothing personal, of course, Jeremy). Thus, i recommend TIPS, gold, or moving to Switzerland if you want to make money that you can leave to your kids..

  18. Barry Ritholtz commented on Jul 9


    The VIX cranked up to 45-50 in 2003 . . .

    Hardly a whimper

  19. Mich(^IXIC1881) commented on Jul 9

    half of the people are waiting for a short term bounce and position accordingly.
    half of the people are waiting for a significant new low from feb-march lows.

    so what would the markets do? probably sideway action, vix to 20, till people get bored, anxious and give up their positions…

  20. DC commented on Jul 9

    Capitulation Countdown is my favorite new show but it feels as legit as pro wrestling. We see coal and miners get whacked by 25% in 3 or 4 days. This is not the result of little guys like me dumping out of IRAs. These moves have to be orchestrated and manipulated at very high levels.

    “They” took out this sector and “they” rotated to that sector. I don’t doubt that there’s an Armageddon looming, but it just seems so damn contrived.

  21. Mike in NoLA commented on Jul 9

    Hussman had a good discussion a couple of weeks ago No Capitulation

    A little while back he had a reprint of something he wrote in 1998 in which he describes something akin to the The Kübler-Ross grief cycle, e.g. anger, denial, etc., Bear Market Insights

    Both of these seem to be generally consistent with Barry’s views. I thought the second article useful in keeping in mind, when you own a bunch of short ETF’s, “history may not repeat, but it does rhyme.”

  22. DavidDT commented on Jul 10

    “Posted by: Bruce in Tennessee | Jul 9, 2008 3:55:09 PM
    The bottom is Cramer AND Fast Money canceled.”

    Hey, CNBC canned 8PM Fast Money – we are well underway :-)

  23. Jojo commented on Jul 10

    From a newsletter dated 5/12/1997 written by Jay Shartsis of R.F. Laffery & Co..

    1974 – What does a real market bottom feel like?

    Until the recent spectacular rally, the past few months had not been very kind to investors as the long awaited 10% connection finally arrived. For many stocks, especially formerly highflying OTC technology issues, the damage was far worse. No doubt some real pain has been experienced, but I thought it might be enlightening, and funny too, as you shall see, to examine the climate and attendant sentiment when the last great bear market was in its final months. That would be back in the summer and fall of 1974, the tail end of a ferocious bear market that began late in 1968. The great post-war bull market ended in November of that year with the DJIA over 1000. It had come up from 160 in 1949. ‘Twas a time much like the present, of unbridled optimism, hot new issues, soaring stock prices, money manager ‘gunslinger’ hero’s – the ‘Go-Go’ years. The slide, for most stocks, wouldn’t end until the fall (October) 1974, six long years later. The average loss during that period for a NYSE stock was 75%. (You read it fight). The average loss over at the AMEX was an unbelievable 88%.

    By the time it was over, stocks were not, as you can imagine, a must own investment. The number of people who were still certain of the long-term up trend in stock prices must have been reduced to perhaps several dozen, not upwards of 200 million. After getting their heads handed to them for those six years, there was very little discussion among investors of building their retirement nest egg in the market. No talk at all of getting more “aggressive” in their investment approach since a meager 15% return the prior year was pitiful, compared to say, the Beardstown Ladies’ results. In short, the stock market was a national joke, though no laughing matter for millions of people who were wiped out. Only the shorts rejoiced. Of course, for those prescient or lucky enough to get in near the bottom, the rewards were tremendous as a 22 year record breaking bull market was about to be born.

    Let’s go back now to that fateful summer 23 years ago. In August (’74), the DJIA had taken another fearful beating, dropping 150 points, from 800 to 656, or nearly 20%. That, in just one month! Watergate dominated the national news scene and the Vietnam peace talks dragged on interminably. The stock market seemed to be a bottomless pit. Average daily volume for the month of August was about..13 million shares. The black humor of the day was captured perfectly by Barron’s Alan Abelson and I quote liberally from his column, “Up and Down Wall Street”, for this article. After reading his observations from that time, I think you’ll see why he’s been around so long. He was terrific and still is.

    0n September 2nd, Abelson reported that “window ledge space on Wall Street is selling at a premium. He picked up that piece of intelligence from a fellow who got his space early and claimed folks have been falling all over themselves to sublet.” From early June (’74) until late August the DJIA had collapsed over 200 points from 850 to 650. That was a 24% decline in 11 weeks and would be equivalent to 1700 points today. Alan commented that “at this rate, we’ve still got a sporting chance to reach zero by year-end. Admittedly conservative however, we rate the odds no better than 50-50”. Very few stocks escaped the whirlwind, which prompted Abelson to remark that at least the “ill wind” silenced those hoary commentators, (all of whom have repaired to their former professional haunts in used car lots,) who never tire of proclaiming that, “it’s not a stock market, it’s a market of stocks”. (Sound familiar?) He further noted that in contrast to similar market “disturbances” in the past, no brokerage house had yet felt compelled to take a full page ad to warn investors not to panic. Alan attributed this failure “not so much to a belated recognition of the virtues of panicking, but simply to the fact that no brokerage house these days can afford a full-page ad”.

    As for the anxiously awaited summer rally, there was one in mid-July. AbeIson observed, “A funny thing happened last week. Stock prices went up. No kidding! We’re sorry if you happened to be at the beach or counting gold coins in a dark corner or snoozing beneath a spreading chestnut tree. Because its one of those rare phenomena, like an eclipse of the sun or an honest politician that occur only once in a blue moon. And there’s no guarantee it’ll ever happen again within our lifetime”.

    He goes on to say, “At the very least, Fridays action takes the wind out of the sails of those unreconstructed cynics. We mean the wise acres who have been so skeptical about one of the Street’s most reliable traditions, the summer rally. Nothing in the book, after all, says that the summer rally has to last for more than a single session”.

    The rally, spearheaded as it was by what used to be known as growth stocks, came in just the nick of time. It saved many investors from making the second biggest mistake of their lives- putting up more margin (the first, of course, was haying stock to begin with). It also literally (if perhaps only temporarily) proved a life-saver to countless investment officers of bank trust departments. Those are the chaps, remember?, who espoused the one-decision approach to growth issues (in case you d6n’t recall, the notion was that one could buy such issues serene in the knowledge that one would never have to sell them because they were immune to the normal investment vicissitudes). Well, the poor souls are still committed (we wish we could find another word) to the one-decision idea – but the decision now is whether to jump or not. Friday’s rally kept them on the ledge. Barrons- July 22, 1974 Investors Intelligence reports that 67.2% of advisors are bearish, the highest percentage of negativism since the survey began in 1963, P-E ratios are the lowest in two decades and the DJIA is at one times book value. It hadn’t been that low since 1949. Now in 1997, the DJIA is at most 5x book value. Note that the huge bear crowd was right! The bottom wouldn’t come for 9 more weeks and much lower prices.

    In early September, with the ultimate market bottom about one month away, Merrill Lynch finally gave in and decided to allow customers to sell naked calls (a bearish strategy of course), a maximum of 50 contracts for accounts with $125,000 in Equity. Barrons correctly suspected that this was a sure sign that the bottom was near.

    The big draw at the time was the “hard money” crowd of advisors. On October 4th and 5th, 1974, James Dines, ‘the original gold bug”, held a gold seminar that was strictly “Standing room only”. By October 4th, the DJIA had collapsed to 585. Ironically, the market was putting in its final bottom as the conference was underway, but not a single speaker at the conference offered any hope for the stock market. With the DJIA at a 12-year low, nobody felt a rally was near. The lowest PE ratios in 25 years and a decline in record high interest rates didn’t tempt them. One of the speakers, a Dr. Ralph Borsodi, who had authored 17 books on economics, declared, “the world faces a depression, akin to the German depression of 1923”. He thought that “we face the probability that the dollar will become virtually worthless and that some form of totalitarianism will eventually take over because capitalism will virtually have committed suicide”!

    A New York Stock Exchange seat sold for $66,000 in September. Here in 1997 one fetches $1.3 million. Houses, by the way, sold for $35,000.

    October 7, 1974, Up and Down Wall Street – Several brokerage firms have printed up brochures instructing their surviving customers on “How to tell the end of a bear market”. Too bad Abelson quipped, that these educationally minded chaps never got around to sending out the companion pamphlet. “How to tell the end of a bull market”. One of these brochures listed ten things to watch for that indicate the likely end of a bear — pessimism, odd-lot short sales, high cash positions of mutual funds… the usual stuff: #10 on the list caught our eye though, “You yourself probably are apathetic regarding the stock market and find yourself primarily interested in other vehicles for investment”. Like what, we wondered? Apple stands? Things had gotten so bad that one of the major banks had instructed portfolio managers in its trust department not to buy stocks until further notice. In fact, many institutions were issuing similar warnings.

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