Capitulation occurs when investors sell equity positions as quickly as possible.The word comes from the military term for surrender, since it occurs when investors give up gains and accept losses to escape a bad position, rather than waiting it out. It is motivated by the fear that stock prices are plummeting, or are about to plummet. Capitulation is best described as panic selling. It results in at least a 10 percent market decline in a single day, and is marked by high trading volume and sharp price decreases. A capitulation occurred during the New York Stock Exchange selloff and collapse just prior to the Great Depression. Capitulations are difficult to forecast and are usually defined only in hindsight. But wild swings in volatility with big price declines are good indicators. A capitulation’s aftermath frequently presents opportunity. That’s when analysts believe everyone who wanted to exit a position has left, and the stock has bottomed out. Its price should then rebound since only buyers remain.
