Capitulation? Hardly

Tuesday, July 11, 2006 | 01:16 PM

For the past 2 days, Rev Shark 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 than does Rev Shark; While we both describe the recent market action as "lousy as all get out," I would hardly call it Capitulatory.

For a true Capitulation to occur, we need to see a "total surrender;" 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


Nasdaq: 3 month Chart



UPDATE: July 11, 2006 2:41 pm

Uss_mo_2Understand 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 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, 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:

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

Tuesday, July 11, 2006 | 01:16 PM | Permalink | Comments (42) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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First of all, Rev Shark is an ultra-short term trader constantly shuffling his portfolio daily as necessary. So capitulation by his definition is different than that of others.

I think he is mainly just referring to the give up that is necessary just for a short term bottom, which may or may not turn out to be a longer term bottom.

Frankly, I don't know how you cannot call Oct 1987 capitulation. Just because markets continued higher after that? Sure it occurred during a very short time frame, but if you could measure puking/stress/pain/panic then Oct 1987 would probably be one of the major peaks. Why is that not capitulation?

You say it requires a laying down of arms, an admission of defeat. Isn't hitting the sell button an admission of defeat? Wasn't there massive just massive selling on Oct 1987? So investors appetite for equities returned after Oct 1987. So the market was positive for the year. Are you saying that there is a requirement for capitulation, that investors need to be down and out for years and years and that the market absolutely has to close majorly negative that year?

Just because stocks eventually roared back does not mean there was not capitulation at that point in time. Can't capitulation occur at any time whether in a bear market or bull market?

Sorry, not ranting here, just asking.

Posted by: Michael C. | Jul 11, 2006 1:58:17 PM

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