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Do You Need Capitulation?
by Charles B. Carlson, CFA
Dow Theory Forecasts

A lot has been written recently about the need for a "capitulation" on the part of the market.

What's capitulation? Basically, capitulation is one of those huge down days, the type of decline of several hundred points on huge volume.

To many market watchers, the market will be unable to move steadily higher until everyone "throws in the towel" and capitulates (i.e. gives up on the market).

Since we have yet to have this big one-day decline on heavy volume, the conventional wisdom says that this market has yet to bottom.

What do I think? First, I always get a bit cautious when someone cites "conventional wisdom" as gospel. I've seen too many times when conventional wisdom is turned on its ear.

Second, I don't believe bear markets have to end with big capitulation. In fact, oftentimes bear markets end, not with a bang, but with a whimper.

Finally, trying to call market bottoms - whether using the "capitulation" method or any other method - is often a waste of time. You may get lucky a time or two, but I guarantee that you'll be wrong more often than not over the long term. And that's what matters when it comes to investing - the long term.

Better to focus on the opportunities being presented in individual stocks rather than trying to pick a bottom in the market before putting cash to work. It's a better way to go for creating wealth in the market.

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