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Blog : Capitulation
September 10th, 2007
Capitulation is a wonderful word.
When everyone who wants out of a stock is selling, or has recently sold, you are facing capitulation.
This generally results in shares dumping, free of any connection to the underlying fundamentals or business prospects of the stock.
At the end of the capitulation, the shares have fallen so much that even the most disenfranchised investors won't unload their stock for the paltry prices they would get for it.
Then a beautiful thing happens. The prices start rebounding. Capitulation has created the perfect investing scenario where:
- all the negatives have been factored into the share price
- group selling has driven prices well below realistic value
- buyers pay less for what the crowd no longer wants
We are seeing a lot of capitulation, and weakness, among penny stocks lately. Expect things to be very different in the coming months, than what we saw over the last several.
Remember, there are 2 kinds of risk. Market risk and company risk.
Market risk is when the entire market, or market segment, trades lower together. This should not cause too much concern about the underlying companies, because it is more of a technical, trading in sympathy move.
Company risk is when a specific stock drops off in price, even when the rest of the market, or it's sector is not. That is usually a warning sign for your stock.
Luckily, with current penny stock capitulation, the weakness is across the board. In fact, shares have been under pressure in just about every industry group, and at various price points.
The reason I say, 'luckily', is that this broad-based capitulation is based on market risk. We should see penny stocks, in general, perform well in the coming months.
In other words, don't fret. Penny stocks having tough times should recover, given a little patience. Recover, and possibly perform strongly from here on out.