That’s when it hits you that there’s capitulation in the stock market. You’ll have two options if you own some of those stocks and aren’t just observing or analyzing the market. One, you can sell along with everyone else. Two, you can hold your stocks. If you do the latter, it’s because of bullish sentiments that the market will rebound.
What Does Capitulation Mean?
Stock capitulation is a large-scale sale of stocks witnessed as the market declines. It happens because of extreme pressure on traders to exit due to bearish sentiments. When many investors react and sell, it triggers a steep drop in stock price.
Therefore, one characteristic feature of capitulation is widespread panic.
Another instance of stock capitulation is during market crashes. However, even as many investors panic, others view the steep drop as a bullish sign to invest in more stocks. As such, they hope to reap better profits when the bear market ends.
What Is Market Capitulation?
Capitulation stock market changes take place at individual and market levels. At the individual level, it happens when investors lose hope. They don’t see the need to maintain their long position. The investor may wait for a while, hoping for a rebound.
But when the price keeps on falling, the trader decides to sell. Such an investor might have read or watched negative headlines and seen it as an opportunity to exit. On the other hand, at the market level, many investors panic sell at once.
Most investors hang on when there’s a slight drop in stock prices and wait for the market to recover. However, if it’s a continuous drop, hope dwindles, and fear of huge losses sets in.
There are several causes of stock capitulation. For example, it can be a bear market. Such stocks can have a price drop as high as 20%. Or, investors might be worried about poor earning reports.
Another cause of panic selling is negative headlines about the company or the market. Once the fear sets in, investors go through a range of emotions. They may start with reluctance, fall into denial, another phase of fear, and then panic sets in.
How to Spot Capitulation in a Stock
Unfortunately, it’s not easy to spot capitulation. In most cases, investors know it happened in retrospect.
That’s because rebounds follow most market dips, so investors notice capitulation when they look at the charts later.
But analysts and market observers see signs of possible capitulation in advance. One of the things they do is stock comparison. They compare the performance of specific stocks against others in the same sector. The sectors include technology, oil, gas, and retail.
That was the case in 2008 when many financial stocks plummeted. Also, you can use various change indicators like price and trading volume to know where the market is heading. For example, the trading volume may increase drastically for a day or longer.
The other place that’ll give you clues is the market. You have to be alert, listening to market sentiments. That’s because negative news can cause a bear market. You might also hear a lot of negative sentiments from investors as they become more pessimistic.
Further, listening to the market is also a strategy for investors who want to gain from buying when everyone is panicking.
You can also watch the market to see the kind of sellers exiting. It might be of less concern if only a bunch of individual investors exit their positions. However, if dozens of institutional investors sell amidst the fear in the market, then you know there’s something more happening.
Another factor that tells you the market is heading to the bottom is when mutual funds withdraw cash. They do this when investor hope dwindles, so they prepare cash volume for clients who want to sell mutual funds and exit.
More traders may also try derivative trading to gain by betting against the market or hedging their investments if the stock prices plunge further.
How Long Does Capitulation Usually Last?
Some traders don’t even worry about when capitulation will end as they gain by buying at such difficult times. So, to them, the longer it takes, the better. They only watch it to be sure there’s still a chance for them to double or triple their investments.
On top of that, they listen to market sentiments and reports to know if the wave of panic selling is over. These might be sellers with diverse portfolios. Hence, a few losses here and there don’t hurt their profits.
When capitulation ends, some investors seize the opportunity to buy on the notion that the traders who wanted to sell already did so to avoid losses.
You can tell the duration of capitulation by looking at the charts. In most cases, the period appears as hammer candles after three declining candles, each lower than the previous one. Since you’re likely to see this trend in retrospect when analyzing market data, you may notice that capitulation lasted between minutes to a month.
But that duration varies as even while comparing charts in retrospect, investors will have different thoughts about when it started and how long it lasted. There’s no market rule or defined duration for how long the market can be at the bottom.
Also, the data is more reliable when capitulation lasts longer than a few minutes. That way, traders and analysts can tell the final price movement.
For investors who sell during that time, the end of capitulation isn’t the end of their mixed emotions. After panic selling, they may even go through a period of apathy and indifference.
Thus, they barely want to look at the prices again or consider investing in that sector. Even when the price stabilizes, they may be reluctant.