The myth of capitulation?

Discussion in 'Trading' started by mokwit, Oct 16, 2008.

  1. We keep on hearing about how once there has been capitulation it marks the bottom - we heard this with BSC - did it mark the bottom?

    My point is that capitulation marking the bottom seems to apply to market shocks with no second slower tsunami wave of collasing property markets behind it e.g '87, 98, but I am not so sure it applies to property based sell offs (UK early 90's an exception?).

    Certainly there is research indicating that with major bear markets the conventional belief of a capitulation marking the bottom is erronous (Napier, Anatomy of the Bear), rather it occurrs when volume has dried up after declining steadily [IMHO as people come to the market to liquidiate losing positions for living costs - yet to come judging by the 56B or so of 401K sales].

    There is frequently a 2-3 year sideways period following a major collpase

    Time will tell, but having seen people getting slaughtered all the way down in the Asian crisis and Nasdaq by convincing bottoms that failed I am not so sure. I didn't buy because to do so would equire me to convert money back from USD into local - something I was not prepared to do.

    Oh well, I imagine the flame kiddies will be along soon - was hoping this might generate some thought/feedback/recollections based on experience.
     
  2. dont

    dont

    Its purely anecdotal but this idea that a big volume down day marks the bottom is crap sell offs often come with small volumes and then seem to churn on big volume. If I could or anyone could tell the bottom they would be very very rich.

    I do feel that any idea of value for a stock will change, people should be demanding a bigger risk premium.
     
  3. zdreg

    zdreg

    mokwit-
    "My point is that capitulation marking the bottom seems to apply to market shocks with no second slower tsunami wave of collasing property markets behind it e.g '87, 98, but I am not so sure it applies to property based sell offs (UK early 90's an exception?)."

    please explain as i find it difficult to follow your thread of thought.

    are u expecting a2nd selloff in property in the UK?

    zdreg
     
  4. My opinion for what it's worth....

    I just think because everyone is looking for it, it just won't happen in the classic sense especially with the hedge fund redemption. I has happened so fast and furious and you don't know when the next wave is coming. 87 was very visable and total panic and even 2003 was different - you could see everyone pull out but it was a slow death.

    When the rest is the mutual fund 401K owner who won't open the statement. And the retailers are tired.
     
  5. Capitulation is where many give up and cry "uncle"... but doesn't necessarily mark a bottom.

    Reference many, many stocks in the Tech Wreck... it's amazing how many had a sharp drop on that day and a huge volume spike when the stock was down 90% off of its high... that's where the majority puked, but generally was not the low price and nowhere near the low in time.

    And according to the Rydex Bear/Bull ratio, the market is NOWHERE NEAR CAPITULATION NOW... in fact by some measures they are as bullish as they were at the top in '07... amazing.

    Rather than panic and capitulation, this market is still all about "buy the dip"...
     
  6. In March of 2003, plenty of people talked about the lack of capitulation in the market, and that we were inevitably going back down through the October 2002 lows.

    None other than John Bollinger went on CNBC and called the rally in the Spring of 2003 "the biggest sucker rally in the history of the market".

    Just watch what happens and act accordingly. That is all you can do.
     
  7. Capitulation is useful for short/medium-term lows, not long-term lows. The latter are determined by fundamentals not technicals/sentiment. Sentiment & technicals like oversold readings just don't work on a really long timeframe.

    You should only get long for the long-term when bull market action returns - scepticism in the face of higher prices, stocks opening weak and closing strong day after day on no news, stocks rallying on neutral or bearish news, stocks being hard to buy, new bull market leaders coming out and going to all-time highs etc etc.

    So use capitulation as a trading timing signal, NOT as an investment decision. For example I think we saw important capitulation just now, but I am only playing it on a weeks/months timeframe at most. For all I know, 2009 could see new lows.
     
  8. If you looked in the right places, there WAS a significant level of capitulation (though some people always look for more regardless of any extreme)... and there WAS a retest of the '02 lows...