Wall Street Lingo: Capitulation
March 20th, 2008 by Grant in: FinanceI’ve been hearing the term “capitulation” being thrown around a lot lately on many of the talking heads programs. In context, it’s used like this: “…we won’t see the bottom of the market until we see capitulation”.
So what exactly does that mean?
In street sense, capitulation means to surrender or give up. You hear it in military history discussions frequently in terms of a surrender. However, in Wall Street sense, it means to “give up” any previous gains as investors sell equities in an effort to get out of the market and into less risky investments.
You’ll see capitulation set in when you see extremely high volume and sharp declines, and you could also equate this to panic selling.
So have we seen capitulation yet? In a sense, yes, but only because “extremely high volume” and “sharp declines” is subjective. In the grand scheme of things, I don’t think we’ve seen the extremely high volume that could indicate capitulation. Perhaps in a few of the individual finance stocks (like Bear Stearns) we’ve seen signs of this, but that’s due to individual stock news.
Capitulation will happen when people figure out that their money will work harder in something other than stocks. Unfortunately, since the Fed has lowered interest rates, its going to be tough to find that line in the sand.
Tags: capitulation | Finance | market selling
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March 29th, 2008 at 1:26 am
I would think capitulation occurs when those living in denial openly admit that a recession is present. Here’s an example:
The Cake is Baked.
I’m expecting more capitulation being announced in the very near future.
March 30th, 2008 at 10:41 am
I’m not sure, but the signs of capitulation could also be slow and occur over a longer period of time.
Even though the returns on cash are poor now after The Fed cuts, people are unsure of what’s a safe investment or where to invest now. Cash offers a safe place to be until investors figure that out.
I like to keep track of the inflows of cash into money market funds. IMO, the more money that flows into money market funds most-likely came from other types of investments, and could be a sign of capitulation.
According to the Investment Company Institute, money market fund levels have increased all year. They’ve dramatically increased in March.
March 30th, 2008 at 12:24 pm
I agree Mike, and along those same lines, I don’t think we’re looking for a one night stand, so to speak.
I think the overall sentiment of the stock market is driving the capitulation sentiment.
I like your idea of tracking cash flow into money market funds. It’s a clear indicator of how investors regard the stock market. They are retreating from high risk and moving to low risk.
Thanks for the link, too.
Grant