By definition, capitulation means to give up or surrender. In the context of stock market investing, the term is used to define a point in time when investors decide to give up on capturing lost gains and sell off the position. When a majority of investors decides to give up on the stock, there is typically a sharp decline in its price. This is known as market capitulation.
Capitulation in the marketplace is important and significant because it can oftentimes indicate a bottom in dropping stock prices and consequently a good time to buy. Basic economic factors confirm that large sell volumes drive stock prices down, while large buy volumes drive stock prices up. Although this concept seems fairly simple on paper, the actual price at which capitulation happens is very difficult to predict.
Capitulation is helpful in specifying the bottom of stock prices because it usually means that most investors that wanted to get out of their positions have done so. This leaves many reliable stocks with a very low price entry point. This is typically when sophisticated investors realize the low point in the market and begin to buy stocks again. The increase in buy volumes therefore drives the stock prices back up.
While conversing with institutional investors on a daily basis, analysts at Brighton House have noticed the interesting turnaround in investor interest since the market low in March of this year. Although summertime is traditionally in slow motion among institutional investors, this year has proven to be a different situation. Investors have consistently expressed genuine interest in hearing from Brighton House managers and many decision makers are staying in the office instead of the usual summer time off.
A portfolio manager at a large European pension fund had some interesting insight on the current market situation. She was very excited about hearing from fund managers who are equipped to recognize market bottoms and have identified low entry points. Markets rise and fall but profit opportunities come up all the time.