PSYCHOCAPITULATION
“Capitulation”… Let me take a stab at understanding it.
First, a disclaimer. I am not a psychologist and not a market person. Its all IMO. Forgive the many probable imprecision’s and imperfections. Take it all in a good spirit, as a sort of a brainteaser.
First of all, “Capitulation” is only an expression. A label, a word, no more. What occurs out there, in the real world, is a human being selling shares at what LATER turns out to be a bottom. A fellow who sold at the NAZ of 2800 now feels smart, but if the market would have bottomed at 2750 and run, he would be seen as a fool and a “capitulation” statistic. Simple, and yet, this mystery of submission, if you will, plays out over and over, in all markets, in all time frames.
Let’s say you are an investor or a fund manager with cash on the sidelines. The market is declining, and you are not about to start catching falling refrigerators. You nibble, you wait… What would give you the confidence to re-enter the market? What you want to see is that as many as possible “weak hands”, in other words, stockholders that are likely to sell for ANY reason of their own, are done selling. The more of them are induced to part with their shares, the better are the odds, that when the market eventually begins to go up, the rally will not be promptly aborted.
On the other hand, the shareholder that is losing money is also observing the markets, hoping for a bottom. The losses are mounting, the pain increases (here I must mention that everyone is different, and their situations and reactions will differ; I am talking about a “generic” situation in order to illustrate the process). The losses keep him up at night. If he sells, there will be a period of grief – he would have to come to terms with the loss of the money, shattered dreams, he would have to grieve for vacations that were not taken, things not purchased, all – in order to save and to be able to invest that money.
Some losing shareholders, sadly, will have to exit the markets because they simply run out of money or reached the absolute limit of their risk tolerance. These situations can and must be prevented by controlling greed and using some basic money management, like, for example, drawing not one, but a few “lines in the sand”, so that exiting the market would be done stepwise, and not all at once.
If a person has no choice, they will sell. It becomes more interesting when, indeed, there is a choice, when selling or not selling is to an extent optional, if the person would be able to sit out the losses and give the market a chance to come back. You see, we are all “educated”, we know a lot about the markets, we know “they always come back”, we saw it all a hundred times…
Question: why would a perfectly reasonable person sell (very) low and accept a loss if they really don’t have to do so? We are told that people do it because they can no longer take the pain. IMO, this is complete nonsense. Humans can take pain, plenty of pain, and we are very patient – for as long as we have HOPE. Hope, that the companies we picked are good, that our financial system is stable, that the economy in general is healthy, and, therefore, the markets will eventually recover.
In order for our “perfectly reasonable person” to be shaken out of the market in an episode of capitulation, this faith and hope have to be damaged. It can only occur when our “Voice of Reason”, our very own trusty rational common sense joins our emotions in one powerful impulse: to SELL!
We are not going to see any serious “Capitulation’s” –not any time soon. We may see micro- and mini- capitulation’s, but not the real big thing. Things look good near the top and bad at the bottom. Things are still good, we (almost) all have jobs, the average mutual fund only lost 2% last year. It is simply and plainly not the right “stage” in the Bear market. Way too early for a real washout, if, indeed, there is going to be one.
The Dow Theory describes the typical 3 (down) wave bear markets. Elliott built on the Dow Theory, but also counts the two intervening “countertrend” rallies, adding up to his total of 5 wave impulse move. Interpretations may differ, and they do.
Good luck to all,
You do not have to be always right, just remember not to stay wrong for too long!
AK |
