Investor Capitulation: What to Watch Now

Bear market bottoms tend to be marked by investor capitulation. Capitulation refers to investors surrendering or giving up hope. Most historians believe capitulation has yet to fully occur in this bear market.

Accordingly, it is likely we still have at least one more significant panic selloff in the cards. The VIX (Volatility Index) may be able to help us monitor the likelihood of capitulation. As outlined in the chart below, a break of 56.65 on the VIX could signal the beginning of another "panic selloff". If 56.65 is exceeded on a closing basis, we may get a few days of sharp volatility (rallies and selloffs) before another significant push lower. This chart is not presented as a forecast, but as one of many ways to monitor the health of the market. Other indicators should be used to confirm any move in the VIX. More than one close above 56.65 would add weight to the evidence.

No Evidence to Suggest Bottom in Stocks: While a sharp bear market rally could come at anytime, little hard evidence exists to support a lasting bottom in stocks. The odds remain firmly behind lower lows, even if they come after a sharp countertrend rally.

Comments

[the_feds_co...:]

Excellent article.Not the usual pumper garbage put out by other writers! Useful information and very relevant -bravo!

Mar 11 03:03 AM

[DavyJ:]

Can I get a refund on my textbook if the market doesn't perform like the book says?

Mar 11 09:08 AM

[Indexor:]

As always, excellent article Chris. Although the VIX is down around 42 this morning, and will likely see that fall further if yesterday's large rally has any follow through over the next few weeks, the 56.65 is a good target to look for when we have that next (last?) downleg. We might not see that selloff in March, as we have several months of declines to unwind in a simple oversold bounce. Whether it's April, July or October, I believe we will see that 640-650 level, or lower, on the S&P500 before we put in a meaningful bottom.

My concern is that, even when the bottom is found, what is going to propel us higher? If the government continues to spend massive amounts of money that we do not have, and the country is pulled (while kicking and screaming by capitalists) toward socialism, it could easily take 20 years before a new generation of investors return to the markets.

Even though we may not be far from "the bottom," we may be waiting a lot longer for investors to be able to make decent returns from the stock markets around the world. Only traders are likely to profit over the next decade or two, assuming they aren't taxed out of profitability.

Mar 11 10:39 AM

[momomiester:]

I think vix works better as and indicator when it has some correlation both inverse or not within a certain time frame. Notice in Oct-Nov..the Vix was climbing and climaxed with a parabolic chart formation. Today the vix is sideways as the market has been plundging. What this might show is lack of put buying at these levels but the serverity of the decline should have bumped the VIX more. I don't think at this level you can rely on it or assume it is going to plundge to indicated capitulation. Also, I doubt with some finacials so low much put buying was bought so the vix might be off.

Mar 11 11:31 AM

[henarl:]

When final capitulation occurs, the VIX will be very low as everyone will have given up on the market and there will be no more buyers or sellers to create volume. That will be the time to buy.

Mar 11 05:24 PM

[Dan Perkins:]

Something important to keep in mind: Your perspective is one separateness from all those capitulators out there somewhere.

When you get true capitulation, you may very well have been sucked into the vortex as well. Capitulation comes when you and everyone else are truly convinced that all the trouble has passed about three times in a row, only to get pummeled again: Dow 5K, then Dow 4K, then Dow 3K.

On the third time, you and everyone truly believe the world is coming unglued, just say, "to hell with it, I give up - that's capitulation.

The whole thing is rather paradoxical and very difficult to remain separated from! It is not as though you will be sitting back and watching all the foolish capitulators!

Mar 11 07:53 PM

[MDCigan:]

Chris,

I enjoy your insightful articles, and normally I am 99% with you, but not sure on this one that the final bottom has to play out this way with another VIX super-spike. 2002/2003 did NOT play out that way:

runningofthebulls.type...

"I keep hearing and reading that the market will not bottom until there is maximum fear and capitulation selling. This is a commonly held view by many investors. But is it true?

No it is not necessarily. Bottoms can be marked by capitulation selling but bottoms are as likely, if not more so, to be marked by selling exhaustion.

In his excellent book Anatomy of the Bear (which I will get around to reviewing), Russell Napier makes the same observation. Napier concluded that at the end of bear markets in 1921, 1932, 1949 and 1982, bottoms were marked by exhaustion selling, not capitulation selling."

Mar 12 10:53 PM