Capitulation Formation

You already know that the big stock market indexes have fallen precipitously from their highs. But are you scared? And if you say yes, do you really mean it, or are you just pretending to be scared?

This seems to be a key element in the very latest markety buzz word: “capitulation.” Capitulation, as an idea, will now stand in as The Thing Traders Are Looking For, replacing “the bottom,” although really capitulation is a way station on the road to the bottom. You can’t have a bottom without capitulation. Got it?

Capitulation was the subject of a nice piece in last night and is the theme of today’s “Heard on the Street” column in the Wall Street Journal. “In general,” the Journal says, “capitulation means that many investors have lost faith in stocks and have surrendered.” One of the traders quoted in that piece adds that one thing to look for is the moment when “sentiment” is not just pessimistic but “totally destroyed.” All this might take the form, TheStreet offers, of a “wicked downstroke” in the markets. Capitulation, then, could be said to mean concentrated fear—a panic, in other words.

It seems odd that this is what Wall Street is rooting for. But what’s really fascinating about capitulation is that it apparently can’t be faked: You can’t just blithely say that Oceania has always been at war with Eastasia; you have to really believe it. Capitulation, it seems, is only achieved at the moment when capitulation, or anything else, can’t really help anymore. Hence TheStreet’s summation points out the current wisdom among traders that the necessary “level of fear and panic … just isn’t present yet.” And if you think that’s scary, well, then, you’re on the right track!