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Has market capitulated? What to watch

Wall Street ended a tumultuous run relatively quietly Friday, finishing another back-and-forth session mixed. More stocks rose than fell even as the major indexes declined.

Still, the Dow Jones industrial average traded within a narrower range than it had in much of the past two weeks. The Dow ended down 127.04, or 1.41 percent, at 8,852.22, but big rallies Monday and Thursday gave all the major indexes sizable gains for the week.

During the market roller coaster of the past two weeks, the veterans of Wall Street started throwing around the word “capitulation.” In the context of the market, it's a term that means the bulk of investors have given up and sold everything they can – and many experts say it's the best time to buy.

So, has the market capitulated? Will it head higher over the coming weeks?

Q: Is capitulation good or bad?

Both. When it's happening, it's bad. Panic abounds as investors watch their portfolios plunge and bail out at low prices. And those who sell low and don't buy back in ahead of the market's upswing are often left with big losses.

But capitulation can turn into a positive thing, because once the purge is over, it's often a great time to buy. Prices are cheap, and there's a lot of money on the sidelines ready to pour back in.

Q: So why isn't everyone gung-ho about stocks right now?

People are still skittish about individual stocks. That's particularly the case with financial stocks, and with shares of companies struggling to finance operations at a time when banks are hesitant to lend money.

Also, no one is positive that capitulation has fully happened yet. That's the thing about capitulation: You don't know for sure it's happened until after it's over. And even if capitulation has happened, the market could swing erratically at these levels for some time before heading higher again.

Q: What are the signs of capitulation?

The signs are big market plunges, high trading volumes and extreme levels of fear.

All these criteria were met Oct. 10, said Alfred Goldman, chief market strategist at Wachovia Securities. That day, the Dow fell nearly 700 points to just 60 points above the low that Wall Street tumbled to in 2002 during its last bear market. Then, it swung dramatically higher.

Q: But that doesn't necessarily mean it's all over, right?

Right. No one knows. It's always possible that fear could hit higher levels and trigger selling again – particularly since the financial system is coming off its highest levels of leverage ever, said Quincy Krosby, chief investment strategist for The Hartford. Leverage is the degree to which a company is operating on borrowed money.

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