According to Wikipedia, in financial circles, capitulation is a term often used to “indicate the point in time when investors have decided to give up on trying to recapture lost gains as a result of falling stock prices.” Under such circumstances, investors generally lose complete confidence in the financial markets and this lack of confidence pushes them to the sidelines until their confidence is restored. History has taught us that these sorts of market recovery timing efforts often result in investors missing out on a significant part of the eventual recovery. Regardless, this is often what happens when capitulation sets in and investors essentially surrender to their fear of more potential losses.
Many thought we reached a point of capitulation when the market hit a bottom on November 20, 2008, when the S&P 500 closed at 752.44 and the Dow Jones Industrial Average (“DJIA”) closed at 7,552.29, and that the ensuing correction had started. There was some momentum building behind this viewpoint as the S&P 500 gained approximately 21% and the DJIA increased by approximately 18% between November 21, 2008 and December 16, 2008.
However, what we have now seen thus far in 2009 is that a point of true capitulation was not reached in 2008 and there is apparently still more room for weary investors to be driven away from the market. Call it “re-capitulation” if you will. The S&P 500 closed at 696.33 and the DJIA 6,726.02 on March 3, 2009 – both new bottoms for this particular bear market. So have we now reached the bottom? I have often said that trying to call a market bottom is an exercise in futility. With that being said though I do believe that we seem to be nearing a point of true capitulation where all areas of the market are being hit, often without sound reasoning, and many investors are losing complete confidence in the markets and financial system.
What this creates, in my opinion, is a tremendous opportunity for those investors who have learned the many lessons that 2008 taught us and are approaching 2009 with a diversified portfolio of investments, perhaps looking to different asset classes than they ever considered before, structured to help protect on the downside while still allowing them to partake in the correction – when it does materialize.