What Does ‘Market Capitulation’ Mean?

When prices in a market fall, the first instinct of many investors is to hang on and wait for values to recover. But if a slide goes on long enough, fear of deeper losses can outweigh such hopes. When enough investors reach that breaking point and sell, the result is called market capitulation.

It’s not easy to tell in the moment -- many dips are followed by rebounds. Some observers look for signs of approaching capitulation in spiking volatility and jumps in equity put-call ratios -- that is, when investors hedge their portfolios on speculation of another selloff. Large-scale movements out of stock funds and into cash are often taken as a signal that capitulation has arrived. A chart included in a Bank of America report in October on capitulation showed that spikes in cash balances have historically been taken as a bullish message to the market, the idea being that once almost everyone who wants to sell has sold prices aren’t likely to fall much further and that the money that investors hoard will eventually be put back into the stock market. Capitulation can also happen in single stocks and in other securities in the bond and commodities markets.