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Analysis | What Does ‘Market Capitulation’ Mean?

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When prices in a market fall, the first instinct of many investors is to hang on and wait for values to recover. But if a slide goes on long enough, fear of deeper losses can outweigh such hopes. When enough investors reach that breaking point and sell, the result is called market capitulation.  

1. How can you tell if a market has capitulated?

It’s not easy to tell in the moment — many dips are followed by rebounds. Some observers look for signs of approaching capitulation in spiking volatility and jumps in equity put-call ratios — that is, when investors hedge their portfolios on speculation of another selloff. Large-scale movements out of stock funds and into cash are often taken as a signal that capitulation has arrived. A chart included in a Bank of America report in October on capitulation showed that spikes in cash balances have historically been taken as a bullish message to the market, the idea being that once almost everyone who wants to sell has sold prices aren’t likely to fall much further and that the money that investors hoard will eventually be put back into the stock market. Capitulation can also happen in single stocks and in other securities in the bond and commodities markets.  

2. Is capitulation the same as a market bottom? 

Not usually. Bear markets can last for years and capitulation only becomes evident in hindsight. If enough investors have been looking for a big selloff to jump back into the market — buying the dip — it’s a sign that not everyone has completely soured on stocks.

3. What’s an example of capitulation? 

The wake of the 2008 global financial crisis is an example of capitulation — and of how hard it can be to be sure if the market has reached bottom or not. After the S&P 500 Index peaked in October 2007, it fell sharply, reaching an ultimate low in March 2009 at 57% below its high. Along the way, though, many traders got burned after wrongly thinking stocks had capitulated, with the benchmark experiencing a dozen different rallies of at least 5%, according to Bespoke Investment Group. The Cboe Volatility Index — Wall Street’s fear gauge — spiked above 80 in November 2008 as stresses in financial markets reached their climax, while investors yanked billions out of equity funds.

• A Bloomberg Opinion column by John Authers on why some investors were desperate for capitulation in October.

• A essay in the Economist on what capitulation can look like.

• A primer on capitulation from Morningstar Inc.

• Four historical charts from thestreet.com showing how hard it can be to spot capitulation in real time.

• A Taking Stock column by Jess Menton on the opportunities that lurk in bear-market rally head fakes.

–With assistance from Michael P. Regan.

More stories like this are available on bloomberg.com



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