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What is market capitulation?

Market capitulation is the point at which investors give up any previous gains in a stock. It is seen as a true bottom of a stock’s price, as long term investors who had previously provided support for the price of the stock suddenly lose interest or are forced to sell as a result of margin calls. The term is used to describe a tidal wave of panic-driven selling. Classic capitulation is said to be a huge sell off similar to Black Monday in 1987, when the Dow Jones Index went into free fall and closed over 20 per cent lower.

In mid-2002 investors continued to hope that the market capitulation point has been reached, and therefore that stock prices would begin to rise again, but it is hard to determine except in hindsight. Some people feel that searching for an enormous wave of selling is a pointless exercise, and that these days markets are likely to experience numerous smaller waves - a series of ‘mini-capitulations’ - rather than a single event.