Capitulation & Comeback

A bear market, as described in the previous chapter, is something any investor could renounce. But they know, they have to get through. It’s just like making it through a sunless November without getting depressed.

In some stock market-cycles of the past, the bear market faded out fairly quiet, no one got killed, and stocks started to recover.

But many longtime investors, as odd this may sound, are not happy with a quite end of a bear market. They know, before a real recovery can take place, it needs a hefty thunderstorm to clean the air.

I happen to agree with this view. Too many times I observed that investors, deep out of the money, jumped on one of the rare good news during a bear market, betting on a quick recovery only to get badly burned once again, when bad news strike back. Desperate people do stupid things, so they make the same mistake over and over again at the slightest chance.

Until they finally capitulate.

To determine that the end of stock market-cycle has really occurred, one has to observe the volumes of shares traded. Normal volumes like previous days indicate no real shake-out. Only when the volumes are substantially higher than average and the market index really got crushed and hit bottom, then the cycle is over.

While the news – then reporting endless about ‘crash’ or ‘bloodbath’ – scare people, the very same day of the capitulation is the beginning of the comeback for stocks.

The media completely miss this important point in any capitulation I observed. High volumes and a really crushed market index indicate two things:
First, there must be a lot of buyers in the markets, otherwise no huge trading volume.
Second, these buyers could ask and get much lower prices for the stocks, that’s why the index hit bottom.

Shares changed from weak into strong hands. And these buyers know: you will never get stocks cheaper than on capitulation-day.

Unfortunately, the majority of private investors are missing this chance. They leave the market when the potential is huge and return when stocks are hot, meaning expensive. But I guess that’s never going to change, it’s probably a cycle too, but it’s the loser’s-cycle.


Have you ever heard about the iphone-index? What’s behind this index and what it tells you about the romanian economy, is explained in the next chapter:

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