Capitulation is an investing term that means the market has hit its absolute bottom. It's a highly emotional state that occurs when investors have exhausted all panic-driven selling. It occurs at the end of a bear market, and is accompanied by a recession. 

Capitulation signals the very beginning of the bull market during an expansion. After it has occurred, the market will rise. This is great for the average individual investor to know, because it means it's time to buy stocks.

However, most investors miss the signals of capitulation, and subsequently miss the most substantial gains.

What Are the Clues?

The first clue is that volatility increases. The market seems to make wild swings on a week to week basis. At the same time, there isn't heavy volume. What causes the volatility? Relatively small trades have a disproportionate impact because the market is shallow. 

The second clue is that some days will have very steep percentage drops with normal volume. This is a sign of fear. It is usually in this phase that the institutional investors get out. This causes false bottoms. After these false bottoms, the market will rise strongly again. However, it rises on light volume. (Source: CNBC, Identifying Capitulation)

The third clue is the combination of steep percentage declines and high volume. A lot of stocks are all dumped at once. This is a sign of panic, as everyone who hesitated before is now desperate to get out of the market. 

The volume can also be produced by  forced selling due to margin calls.

 This selling climax shakes out all the weak hands in the market. It kills the margin speculators. It wipes out those who have finally lost patience. It removes the speculative money in the market because people think the risk is too great. 

Many times the final stage is triggered by average investors who pressure their stockbrokers to completely get out of the market at any cost. In the end, there is no interest by most investors to buy anything. (Source: WSJ, Capitulation, May 5, 2014)  

Since capitulation is difficult to recognize, Here's how to recognize the signs and spot when capitulation has occurred in history.

When Has It Occurred?

Most recently, capitulation occurred on March 5, 2009 when the Dow Jones Industrial Average reached its post-recession low of 6,594.44. It had fallen more than 50% in just 17 months. This was the most painful since the Great Depression, when markets experienced an 80% drop. In a way, it was worse because that drop, though bigger, took three years. Capitulation didn't occur until almost 18 months after the Dow had reached its pre-recession all-time high of 14,164.43 on October 9, 2007.  Here's the timeline and false bottoms:

• March 11, 2008 - The Dow had fallen 20% to 11,740, a signal of a bear market. However, volume was only 312,020,000 share. That looked like the market bottom to those who didn't know better. 
• April - The general public didn't realize we were in a bear market until the failure of Bear Stearns.
• May 19, 2008 - The Dow rose to 13,028,  but volume was only 205,400,000 shares.
• August - Stocks had recovered to the point where they were only down 11% since the first of the year.
• On September 15, 2008, Lehman Brothers declared bankruptcy, and panicky bankers withdrew $144 billion from money market funds two days later.  The Dow fell to 10,609.66, on 463,200,000 shares.  During the 2008 financial crisis,  The S&P 500  plummeted 28% in the three weeks after the Lehman Brothers bankruptcy. It fell from 1,255 to 900 between September 19th - October 10.  However, it rallied before true capitulation.
• October 10, 2008 - The Dow plummeted to 8,579.19 on 674,920,000 shares. That looked like capitulation, but wasn't.
• November 20, 2008 - The Dow fell to a new low of 7,552.29. Volume was 528,129,984 shares. 
• January 2, 2009 - The Dow rose to 9,034.69 on January 2, 2009, leading many to believe the worst was over. However, volume was only 213,700,000 shares.
• March 5, 2009- True capitulation occurred 365,990,000 shares.However, the market had dropped two weeks earlier on 660,000,000 shares.

2001 Recession

• January 14, 2000 - The Dow closed at its high of 11,722.98, thanks to the boom in Internet businesses.
• March 7 - Hit its first bottom of 9,796 on . It bounced around until the markets closed following the terrorist attacks on
• September 11, 2001 - Terrorist attacks closed the markets.
• September 17, 2001 - The Dow dropped to 8,920.70.
• October 9, 2002 - Capitulation occurred when the Dow closed at 7,286.27, a 37.8% decline in total.  from its peak. No one knew for sure if the bull market had begun until the  on
• March 11, 2003 - The first sign of a new bull market,  when the Dow finally hit a higher low at 7,524.06.

1998 Currency Crisis

In 1997, Thailand cut its peg to the dollar, leading to a devaluation in currency throughout Southeast Asia. A year later, Russia devalued the ruble and defaulted on its bonds. The stock market dropped 20%. The Long-Term Capital Management hedge fund nearly collapsed, threatening to push its banking investors into bankruptcy. Then-Federal Reserve Chairman Alan Greenspan convinced them to support the hedge fund, averting further disaster.

1990-1991 Recession

• July 1990 - Iraq invaded Kuwait. The Dow was at 2,911.63. 
• October 16,1990 - Capitulation - The Dow had fallen 18%  to 2,381.99.

1987 Stock Market Crash

• October 19, 1987 - The Dow fell 22.6%, from 2,246.73 to 1,738.74 in one day. This was a capitulation  that occurred in a one-day stock market crash.

1980-1982 Recession

• February 13, 1980 - The Dow was at its high of 903.84.on February 13, 1980 to a low of  on
• April 21, 1980 - The Dow had fallen 16% to 759.13. 
• April 28, 1981 - The Dow rose to 1,004.32. However,the Fed had to raise rates to combat inflation.
• August 12, 1982  - Capitulation. The Dow was down 22.6% to 776.92.

1973-1975 Recession

• January 11, 1973 - The Dow  hit its peak of 1,051.7.
• December 4, 1974 - Capitulation. The Dow had fallen 45% to 577.60.

1970 Recession

• December 31,1968. It hit its high of 908.92.
• May 26, 1970 - Capitulation. The Dow dropped 30% to 631.6. Article updated June 14, 2014.