CAPITULATION

Capitulation in finance means a surge of selling pressure when the market is declining or when any security notices the mass surrender by investors.

Capitulation is a kind of negative market sentiment for the overall market or can be for any particular security. Capitulation results in a dramatic drop in market price as there is more supply than demand. In a capitulation scenario, people who don’t sell securities under pressure will sell sooner or later as there is negative market sentiment and prices are going down dramatically.

Capitulation typically follows a downturn or decline in price, even when many investors are bullish on security or the market. As the downturn accelerates, it reaches a point where the investors are unwilling to suffer further losses which leads to a dramatic plunge in price.

For example –

On March 18, 2020, the S&P 500 index was down nearly 10% from the prior day’s close amid the COVID-19 market collapse, only to reverse and close down 5.2% on the day and 1.6% below where it opened.

But, On March 23, 2020, the S&P 500 plunged nearly 5% intraday at its lows but managed to close with a loss of “just” 2.9%. We know that was capitulation because the index went on to gain 17% over the next week.

Generally, Capitulation happens when there is great uncertainty, market volatility and a lack of confidence from investors in security or the overall market.