Are You Ready For The Capitulation?

Be ready both financially and emotionally!

What is Capitulation you might ask?

Capitulation is essentially the panic selling that occurs at the bottom of a correction or bear market. It usually comes on a big down day with high trading volume. The term is derived from a military term which refers to surrender.

The belief is that everyone who wants to sell a stock for whatever reason has done so. This includes overreactions by panic stricken investors and forced selling due to margin calls. This capitulation is typically the sign of a bottom, but it comes with a price…the pain and suffering of going through it.

Capitulation is important because it scares a large amount of investors to feel so bad that they think the worst is yet to come. It serves to flush out inexperienced and emotional investors, causing them to panic.

Capitulations can only be identified after they have occurred. Many try to recognize or anticipate capitulation selling, but the reality is that capitulations are outcomes that result from the maximum psychological damage and financial pain that can be endured by investors before throwing in the towel. In other words, the selling is so dramatic with the market down a large amount that you feel absolutely awful, wishing you had never put a dime in stocks and swearing that you never will again. Presto, you have a bottom.

My reason for this lesson is that it is possible that we will still see a “capitulation selloff”, that final drop that signifies a bottom. However a further drop in the market is certainly not given as the stock market lows may already be in. Either way, you cannot trade it, so don’t even try. You will just whipsaw yourself.

If and when the capitulation sell-off does finally hit us, be ready both financially and emotionally! It is important that you do not let emotion take over and cause you to panic into a deadly mistake. You may want to, it will probably make you sick, and you may hate me, but you’ll be glad in the end. Even if we do get it, I don’t believe we have much more to drop.

Of course, if the overall situation turns negative and it is time to hit the sell button because it’s not just a correction, but a bear market, then we will take definitive action. It’s what we help our clients with every day.

 

If we can help, just give me a call.

 

Cheers -Keith Springer
916-925-8900

P.S. “Invest for need, not for greed!™”

 




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