When one refers to capitulation, it is about conceding. A stock market capitulation means that one has to sell their shares at a lesser point than their buying price. This happens when there is an elongated decrease in the financial markets. When any investor is present during a stock market capitulation, they surrender by opting for a previously unrealized capital loss. They do this by selling their shares rather than continuing with them to avoid further losses. The stock market capitulation is nearly self-reinforcing. It can lead to a cascade during which the cost of a share declines a lot over a short time. Suppose the cost of the shares has been in this position of decrease for nearly half a year. In that case, there may be some more negative news or disappointing earnings forecast. This leads to another selloff that leads to a decline in the cost of the shares by some percentage points on a daily basis. This can lead to more investors exiting their position. It takes the cost of the share to an even lower point.

This cascading effect can lead to the cost of the share to crash, thoroughly supporting levels that had been developed previously. This makes the new floor price not clear. After all the panic, sellers of the shares surrender. This is when the share cost stops declining by a huge margin and starts to stabilize. Then, investors who are still confident about the share may think that it has reached its bottom and may look at it as a chance to buy some more shares. They hope that the share will get back to its original position and may also start to appreciate. This is based on the prediction that all the investors who were going to sell their shares have sold them by now. So, only buyers of the share remain in the market. It is hoped that these buyers will lead to an increase in the price of the share. But finding out about the end of such a period of stock market capitulation is not easy to do until it has already taken place.

What Is Stock Market Capitulation?

The stock market capitulation happens when there is panic selling in the entire market and affects most of the listed shares. This usually happens when there are corrections in a bear market, and most of the financial market starts to lose its value. If a lot of the shares have been in a position of slight decrease, then higher decreases start to happen. Investors may start selling their shares and shifting their remaining wealth into more stable investment instruments such as government bonds, corporate bonds, precious metals, or preferred stocks. It can lead to faster decreases in the price. This can cause greater fear in the investors and lead to more selling. When the psychological effects of such unrealized capital loss grow robust and widespread enough, there might be a recession across the entire financial market. But this does not usually happen.

What Causes Stock Market Capitulation?

The stock market capitulation may sometimes take place after there has been a major event. One instance is the closure of the housing bubble that led to the banking crisis. It caused immediate selling across the entire financial markets, which turned into a serious recession. A couple of years ago, the coronavirus pandemic also started a series of stock market capitulations. But it was not so serious and of a shorter duration than the recession because of the sell-offs. When it comes to any particular share rather than the financial markets at large, the stock market capitulation can happen after some disappointing news. This can be earnings estimates that were not achieved or declining sales. The news is released when there is already a period of decline. This assumes that the resulting decline in the share cost is great enough to scare a large number of investors into selling their portion of the shares.

How to Spot Stock Market Capitulation 

The stock market capitulation is easier to find out about after than when it is actually happening. But investors who would like to purchase the share at its bottom price often attempt to find out about the end of a period of stock market capitulation so that they can purchase a share before it reverses. One of the methods by which traders try to do this is by finding out the candlestick chart of a share to find out if they can identify a hammer candlestick after a period of decrease. All the candlesticks on any chart show the low, high, close, and open costs over a certain period. A hammer candlestick happens when they close and open near each other. It is shown by a short thick. Here, the bottom shadow is very long, and the full shadow of the candlestick is short. This shows that the share traded quite low during a lot of the period being examined before rallying and closing out near to the open price. It does not matter whether the closing is below or above the open price. 

Usually, these candlesticks are often present at the bottom of a share at the culmination of a period of stock market capitulation and decreases. Just before, there was a reversal in the prices. But it may not be the same at all times. This is because the trends of the past do not guarantee the results in the future. Trying to find out about the post-capitulation bottom of a share using the candlestick charts involves risk, just like the other strategies of investment.

How Long Does Stock Market Capitulation Last?

There is no major principle for how long the stock market capitulation can run. Even when seen in hindsight, various investors may have differing opinions about when a particular period of stock market capitulation started or finished precisely. The time of stock market capitulation that happened after the coronavirus pandemic started in February a couple of years ago and lasted until March of that year. So, the entire process of stock market capitulation during that time took nearly a month. But all the situations are different. The panic selling of single shares can happen faster than capitulation in the whole market. One of the signs that there is a stock market capitulation is that oil has reached a certain level. This is a component that is overlooked by many people. But it is a major part of stock market capitulation. But it is not the only one. Usually, oil has been a very noncorrelated asset. This means that it does not have a lot of relationships with the wider movements in the financial markets. But in the near past, the decline in crude oil in a couple of asset classes has been nearly in sync with the market. For this sale to stop, the crude does not need to go back to its previous prices. But it is needed to get to the bottom somewhere.

Quincy Krosby, a market strategist at Prudential Financial, said, “One thing about a bear market is we typically say it’s death by a thousand cuts. It just goes on. It just wears you down. If this is oil-related and you see stabilization, perhaps that’s the key. That’s the one catalyst that gets the market back up. No one knows how much the Fed’s liquidity pushed the market higher. What’s happening now is the market is making the unwinding adjustment to find that equilibrium. The market is now expecting at the Jan. 27 meeting that, in essence (Fed Chair) Janet Yellen will capitulate. In diplomatic terms, not saying she made a policy mistake, but that we’re watching events, something along those lines.”

Conclusion

Suppose you can look at a stock market capitulation. In that case, it can help you find out about the possible bottom of the cost of a share or the entire financial market. If you can closely follow the stock market capitulation, you can get a great buying chance of shares at their bottom prices. The length of a stock market capitulation can be long or very short. A longer duration gives more sturdy information that can be studied on a Japanese candlestick chart. Examining this information permits investors and experts to find out the trends in the price movements of the financial markets.