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Capitulation? Hardly

Posted By Barry Ritholtz On July 11, 2006 @ 1:16 pm In Apprenticed Investor,Investing,Markets,Psychology,Technical Analysis,Trading | Comments Disabled

For the past 2 days, Rev Shark [1] at Real Money has been talking about the recent action as a Capitulation.

I have to disagree. Perhaps I have a different definition of Capitulation [2] than does Rev Shark;
While we both describe the recent market action as "lousy as all get
" I would hardly call it Capitulatory.

For a true Capitulation to occur, we need to see a "total
Interest in equity ownership will be replaced with disgust
and loathing. I do not think we are there yet

I don’t think of 1987 as a capitulation at all; stocks got ahead of
themselves, and they saw a major correction. It was a short sharp drop
that gave back 8 months of gains — yet 1987 was still a positive year. Within a few days of the 23% drop, stocks started to
climb again, and didn’t let up until March 2000. The appetite for
equities was hardly diminshed, and the correction was only temporary.
Indeed, at the time, we were still in the first third of the 1982-2000
bull market.

True capitulation involves laying down of arms, an admission of defeat. That does not define 1987 to me.

Think back to the selling climax we saw June 13/14 — I would say that
was mildly capitulatory at best. After a solid month of selling, we saw
some extreme readings. But that was as much as buyers strike than a
true capitulation. I think of 9/21/01, the Friday after markets
reopened post 9/11. Sellers sold until they were exhausted.

Maybe this is only a semantic disagreement, but that’s not where we are
now; Heck, as of last Thursday, markets were the highest they had been
since that June low. Barring a 9/11 type event, I suspect we need more
than 2 or 3 days of selling for a true capitulation to take place.

It wouldn’t surprise me if we revisited those June lows pver the next few weeks (see chart below) . . .


I will add that the Nasdaq looks much much worse than the Dow does — but when Capitulation occurs, it typically applies broadly to all investors.

Dow: 3 month Chart

Dow_shark_1 [3]

Nasdaq: 3 month Chart

Nazz_shark [4]


UPDATE: July 11, 2006 2:41 pm

Uss_mo_2 [5]Understand this: Capitulation is something special.

Its not a tradeable low, or a short term bottom, or a quick reversal. Capitulation is not a term to be used lightly by day traders or housewives, sitting at their screens wearing a nightgown and slippers, flipping a few 100 shares of Haliburton or Yahoo.

No, true capitulation is public resignation in the face of the inevitable. Its falling on your sword — or in the case of the Japanese generals, not falling on their swords for the sake of millions of their countrymen, making the more difficult and honorable decision to surrender. Capitulation was turning over their swords [6] on the USS Missouri to the Americans; 

It was General Robert E. Lee at Appomattox, with his men too weak and exhausted to fight on [7], realizing there was little choice but to surrender his Army to General Grant.

THATS capitulation; not a market down 50 and climbing back towards the flatline.


UPDATE 2: July 13, 2006 9:58 am

As you can see from action over the past two days, the Friday/Monday selling was hardly what you would call "capitulatory."

See, once there is a capitulation, the selling is supposed to end. 300 Dow points and 3% on the Nasdaq is not consistent with a capitulation on Monday.


UPDATE 3: July 15, 2006 8:58 am

For those of you without RM access, here is Rev’s response:

Semantics [8]
7/11/2006 2:37 PM EDT

"Yes, Barry, I believe you are focusing on definitional issues rather than my larger point. I’m simply pointing out that turns often occur not in a sudden burst of passion, but only when market players are feeling miserable and lonely and want little to do with the stock market. A sudden laying down of the arms is a nice, neat indication of a bottom, but the market is seldom that cooperative.

It seems to me that the misery level is approaching a point where we are due for a relief bounce. I have no idea how much of a bounce we might turn and by no means am I predicting that a lasting low is in, but it strikes me that conditions are ripe for a stealth capitulation that will produce a bounce."


UPDATE 4: July 17, 2006 6:58 am

It turns out I am in Richard Russell’s camp:

"Three days in a row with the Dow down over 100 points each day — you don’t see that very often. But still no signs of real fear, no capitulation, no panic — just down, down, and down. The key consideration here is that there is still no sign of big money coming into this market. In fact, the big money has been leaving this market all year. … The longer the market continues down without a panic decline, the worse the ultimate panic will be when it arrives."

Via Peter Brimelow, Marketwatch [9]

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/07/capitulation-hardly/

URLs in this post:

[1] Rev Shark: http://www.thestreet.com/p/rmoney/revsharkblog/10296067.html

[2] Capitulation: http://www.investopedia.com/articles/analyst/080702.asp

[3] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/dow_shark_1.png

[4] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/nazz_shark.png

[5] Image: http://bigpicture.typepad.com/photos/uncategorized/uss_mo_2.png

[6] turning over their swords: http://www.history.navy.mil/photos/events/wwii-pac/japansur/js-8.htm

[7] too weak and exhausted to fight on: http://www.eyewitnesstohistory.com/appomatx.htm

[8] Semantics: http://www.thestreet.com/p/_rms/dps/cc/20060711/columnistconversation1.html#entryId10296132

[9] Peter Brimelow, Marketwatch: http://www.marketwatch.com/news/story/Story.aspx?guid=%7BB073F200%2DBAFD%2D4A0A%2D9B9C%2D8AFD57590430%7D&siteid=

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