Add capitulation to that list of terms no one had ever heard of a few weeks ago but is now on the tip of everyone’s tongue.
It means to surrender, to give up, to throw in the towel.
For investors, capitulation means they are no longer holding on to stocks in a down market in the belief they will one day recapture their losses. It means they can’t -- or aren’t willing -- to absorb any more losses and are dumping stocks en masse, hoping to start over with a clean slate, maybe tomorrow.
“It’s when the last guy gives up and jumps overboard,” said Richard Peterson, managing partner of MarketPsych, a consulting group.
Murmurs of a capitulation were first heard earlier this week. The murmurs grew louder as the week wore on.
By Thursday the term was becoming ubiquitous.
That’s hardly surprising.
Let’s consider the numbers: the global credit freeze, believed by many analysts to be the biggest financial crisis since the Great Depression, has shaved 5500 points from the Dow Jones Industrial average in the past year. The blue chip index has plunged nearly 2,700 points in the past eight sessions alone.
The VIX, the Chicago Board Options Exchange Volatility Index, aka the fear index, has been soaring in recent days. It closed Thursday at a record high 63.92, just below its intraday all time high of 64.60.
Stocks rose early today and then settled for much of the session about 150 points in the red. But late in the afternoon the bottom fell out, and the Dow closed down 678.91 points, or 7.33 percent on the day, tumbling about 500 points in the final hour alone.
This might be -- but is not positively -- capitulation.
All is not lost, however. Capitulation is, paradoxically, viewed as sort of good thing because it is seen as forming a bottom, a foundation from which stocks can begin to rise.
It’s sort of like having that sore tooth pulled because it finally ends the pain.
The question is whether a fall of nearly 700 points is actually the bottom given all the bad economic news still gathering on the horizon. Who knows how many more home loans will be defaulted on in the next six months or year?
Gus Faucher, director of Moody’s Economy.com, believes we’re probably close to a bottom.
“We may not recognize it now. In fact, we probably won’t know it for a few months. But pretty soon the bottom feeders will come in,” he said.
Dow Falls 189; Fed Can’t Stop the Bleeding
